Weekly Market Update: March 25, 2024

Alex Ralicki |

Inflation remains stubbornly high. True, the pace of price growth has slowed considerably from the peak rates seen over the last couple of years, but getting to the Federal Reserve’s target of 2% annual growth is proving daunting. This was reflected in the recent re-acceleration in price growth at both the consumer and producer (wholesale) levels in February.The latter was a bit troublesome, as growth at the wholesale level may well drive an increase in the Personal Consumption Expenditures (PCE) Price Index, the assessment of inflation most closely tracked by the central bank.

Treasury market yields rose on the stronger price data. The yield on the benchmark 10-year Treasury note climbed above 4.30% in the days leading up to the March Federal Open Market Committee (FOMC) meeting, which was to conclude shortly after we went to press. The FOMC was expected to leave the federal funds rate in the range of 5.25% to 5.50%. It should be noted that the price of gold, which fell to a 2024 low of $2,004 an ounce on February 14th, has surged in the last month on worries about inflation and a slowdown in the pace of economic growth.

The central bank is walking a tightrope on monetary policy. Senior Federal Reserve officials don’t want to cut interest rates too prematurely and risk seeing inflation pick up again. However, they also want to avoid pushing the economy into recession by keeping monetary policy too restrictive. Wall Street appears to be thinking that the Fed is more concerned about the latter scenario and will pivot on the interest-rate front, perhaps as early as the June FOMC meeting. On point, stocks of higher-growth, but less-profitable companies, which typically don’t fare as well in a rising rate environment, have appreciated on the expectation that the Federal Reserve will loosen the monetary reins later this year.

Conclusion: Equity market valuations are looking extended following the conclusion of earnings season. However, with Wall Street thinking the Fed will begin cutting interest rates later this year and earnings growth forecasts on the upswing, a further move higher this year is plausible. In this environment, we recommend a portfolio headlined by high-quality stocks. 


Source: ValueLine.com