Can you believe we’re halfway through 2024 this Friday? It’s been a tale of two quarters so far for markets (and macro).
A strong economy boosted stock prices in the first quarter, but it also boosted inflation and led to higher interest rates.
Stock and bond yields rose in tandem in the first quarter.
- Nasdaq 100 Earned +8% (lower graph, blue line),
- 10-Year Government Bond Yield Rose It rises by more than 30 bps to 4.2% (black line).
Back in April, we looked at why stock and bond yields moved in tandem: Simply put, the economy was beating expectations, and a strong economy was good for businesses (pushing stocks higher), but it also put upward pressure on inflation (rising interest rates).
Interest rates affected stock prices in the second quarter
In the second quarter, the situation was nearly the opposite: whenever interest rates rose, stock prices fell, and vice versa.
Economic data continued to perform well (green text) at the start of the quarter, pushing the 10-year Treasury yield up to 4.7%. At that point, rising rates began to weigh on stocks, leading to a sell-off in the Nasdaq 100 Index at the start of the quarter.
However, in late April the economy hit a turning point and the data began to soften (go into the red). Here are the results:
- Controlling inflation: CPI and PCE inflation rates finally After rising through the first quarter, it has started to slow again, and producer prices are also slowing.
- Softening labor statistics: The May employment report was relatively “soft” and jobless claims are starting to increase slowly from historically low levels.
- Consumer Spending Deceleration: Excess savings have almost disappeared (especially among low-income households), real wage growth has slowed (but remains positive), and rising interest rates are discouraging large purchases that require financing.
- Small and medium-sized enterprises Margin pressures: Reduced pricing power and higher borrowing costs have led to lower margins and a relaxation of hiring plans.
As the economy slowed, the market (later) priced in further rate cuts, pushing stock prices higher.
With inflation remaining elevated and employment remaining strong, the timing of the first rate cut continues to be postponed (the orange line starts above the grey line).
However, the weak data has increased expectations of a Fed rate cut (in 2025). Currently, the market expects rates to fall to near 4% by the end of 2025. Next This is 45 bps lower than in late April and has helped bolster the Nasdaq 100 Index, which is now up +17% year to date.
So interest rates started to affect stock prices in the second quarter, but as the market showed signs of slowing, interest rates fell and stock prices rose.
In fact, the market has already reached the year-end target set by many economists in January, with some expecting continued good news and some even upgrading their forecasts, such as Goldman Sachs expecting the S&P 500 to rise further. 2.5% From now until December, Evercore Ten% Gain.
However, with the Fed’s rate cuts delayed, it remains to be seen whether the soft landing the market is hoping for can be realised.
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