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I’ve been reading magazines lately and jotting down interesting excerpts. These quotes include “…interest rates have shot up higher than anyone could have imagined…,” “looming recession, government paralysis, and the threat of war,” “voters are indeed angry,” and “Americans are…worried about their financial future.” Some of you may be nodding your heads. Would it shock you to know that those selections are from 1982, 1990, 1991, and 2002, respectively?1
Those quotes did appear during challenging times for the U.S. economy, but also during or on the eve of monetary policy easing. It’s perhaps no surprise then that they also marked the beginning of prolonged market advances, albeit with inevitable volatility along the way.2
The more things change, well, you know the rest.
…the stock market tends to do well when the Federal Reserve (Fed) cuts interest rates and the U.S. economy avoids a recession.3 If that’s the case, then with the economy as resilient as it appears to be and the Fed poised to cut rates,4 the backdrop for equities over the next year is likely strong.
Why am I talking about cutting rates? Wasn’t January’s U.S. Consumer Price Index (CPI) hotter than expected?5 It was, although a 3.1% yearly advance in headline inflation does not suggest to me a lack of price stability. Rather, it indicates that a few components of the consumer basket, such as Owners’ Equivalent Rent (which no one actually pays) remain sticky. Here’s a few price-related stats that may ease concerns:
Get ready for a two-handle on inflation!
I’ve been willing to die on the hill that presidential elections don’t matter nearly as much for markets as people suspect. I have the charts to prove it. Nonetheless, I’m still often asked to make sector or industry calls based on the election outcome. The challenge is that the “obvious” sector or industry calls are often wrong.
For example, when Donald Trump won in 2016, many thought that would benefit traditional energy over clean energy, and the opposite was expected when Joe Biden won in 2020. The reality was that clean energy outperformed meaningfully under Trump, while traditional energy outperformed meaningfully under Biden.11 Most people didn’t have that on their bingo cards.
“We do not consider politics in our decisions. We never do. And we never will.”
– Fed Chair Jerome Powell12
I’m always being asked in election years about the politicization of the Fed. Inherent in the question (particularly this year) appears to be a concern that Jerome Powell and the Federal Open Market Committee (FOMC) would conspire to lower interest rates to support Biden’s re-election chances. The fact that Powell and two other members of the FOMC were appointed by Trump does not appear to enter the thinking.
Admittedly there is past precedent for a politicized Fed, but you’d likely have to go back a half century to when Richard Nixon told his Fed Chair that he was “counting on you, Arthur (Burns), to keep us out of recession.”13 I see no evidence of this again in the past 50 years. For example, did Alan Greenspan, a lifelong Republican and known Ayn Rand devotee, willingly lower interest rates in 1995 to help Bill Clinton win the 1996 election? Did Ben Bernanke, who was appointed by George W. Bush, keep interest rates at zero from 2009 to 2012 to help Barack Obama?
The Fed does not take its independence lightly. I’ll rest assured believing that policy will be set based on the Fed’s dual mandates of price stability and full employment, and not on who they prefer occupies the executive branch of government.
Brian Levitt is Global Market Strategist at Invesco and cohost of Invesco’s “Market Conversations” podcast.
Notes
1. Sources: The first, second, and fourth quotes appeared in Time Magazine and the third quote was from The Washington Post.
2. Source: Bloomberg, 2/14/24. Based on the S&P 500 Index.
3. Sources: Federal Reserve Economic Database and Bloomberg, 2/9/2024. Based on monthly S&P 500 total return data in the 12 months before and 12 months after the first cut in previous easing cycles: Mar. 1970, Sept. 1971, Sep. 1973, Jul. 1974, Apr. 1980, Jan. 1981, Jun. 1981, Apr. 1982, Oct. 1984, Jun. 1989, Jul. 1995, Sep. 1998, Jan. 2001, Sep. 2007, Jul. 2019.
4. Source: Bloomberg, 2/14/24. Based on Fed Funds futures rates. Fed funds futures are financial contracts that represent the market’s opinion of where the federal funds rate will be at a specified point in the future. The federal funds rate is the rate at which banks lend balances to each other overnight.
5. Source: U.S. Bureau of Labor Statistics, 1/31/24.
6. Source: New York Fed, 1/31/24.
7. Source: National Federation of Independent Businesses, 1/31/24.
8. Source: National Bureau of Statistics of China, 1/31/24.
9. Source: Bloomberg, 2/13/23.
10. Source: U.S. Bureau of Labor Statistics, 1/31/24.
11. Sources: Bloomberg, Invesco, 1/31/24. The S&P Global Clean Energy Index is designed to measure the performance of companies in global clean energy-related businesses from both developed and emerging markets, with a target constituent count of 100. The S&P 500 Oil, Gas, and Consumable Fuels Index represents the oil, gas, and consumable fuels industries within the S&P 500 Energy sector. An investment cannot be made in an index. Past performance does not guarantee future results.
12. Source: CBS News, “Fed Chair Jerome Powell shares why central bank hasn't yet cut interest rates, even as inflation falls,” 2/4/24
13. Source: Barron’s, “The Fed Whiffed on Inflation in the ’70s. It Doesn’t Want a Repeat,” 10/10/23
Disclaimer
© 2024 by Invesco Canada. Reprinted with permission.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
The opinions referenced above are those of the author as of Feb. 22, 2024. These comments should not be construed as recommendations, but as an illustration of broader themes. This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations. Diversification does not guarantee a profit or eliminate the risk of loss. All investing involves risk, including the risk of loss.
Diversification does not guarantee a profit or eliminate the risk of loss.
All figures are in U.S. dollars.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
All investing involves risk, including the risk of loss.
Past performance is not a guarantee of future results.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.
Commissions, trailing commissions, management fees and expenses may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the simplified prospectus before investing. Copies are available from your advisor or from Invesco Canada Ltd.
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