Will the Fed Raise Rates Again? Does it Really Matter?

For nearly two years, all eyes have been on the Fed and whether another rate hike is coming. Mitch argues that it may be time to shift focus. [Mitch on the Markets] What’s Next for the Fed and Interest Rates? It Might Not Matter For the better part of two years, the Federal Reserve has been the center of attention for investors and market watchers. The most important question every few weeks for many investors was, will the Fed raise rates again, and if so, by how much? The Federal Open Market Committee (FOMC) meetings were, for many, the single most important factor determining the fate and direction of stocks.1 Today, the debate centers around whether the Fed will raise rates at their next meeting by 25 basis points. Beyond the next meeting, investors are trying to forecast whether rates will hold steady at 5.25% - 5.50%, whether they may tick slightly higher, or whether the Fed may eventually start cutting rates. But at this point, I’m not sure these particular details matter all that much to the economy or stocks, as I’ll explain below. I think it’s time to shift focus. --------------------------------------------------------------- [Interest Rates and Their Effects on Your Investments]( How will the Fed and interest rates affect your investments this year? The market is unpredictable, but that doesn’t mean that you need to worry. To help all long-term investors, I’m offering our just-released July Stock Market Outlook Report. This report will give you access to our forecasts for the months ahead and insight into where to invest. - Zacks June view on equity markets - Setting U.S. returns expectations for 2023 - Zacks Rank S&P500 sector picks - What’s alive for 2023 pessimists - And more… If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! [Download Our Just-Released July 2023 Stock Market Outlook Report 2]( --------------------------------------------------------------- The stock market may be the clearest indicator telling investors it’s time to move on. As seen in the chart of the S&P 500 below, the Federal Reserve has raised rates by a cumulative 275 basis points since September 2022. In that time, stocks have rallied considerably, rising nearly +20% from the October lows (as I write). If interest rate increases and monetary tightening really mattered as much to the markets as many purport, shouldn’t stocks have continued to struggle over the last seven months? S&P 500 from January 2020 – Present [MOTM_07012023_graph1] Source: Federal Reserve Bank of St. Louis 3 In my view, the message here is that stocks are now looking past remaining Fed decisions for 2023, and investors may be starting to price-in expected economic and earnings growth well into 2024. Now, there’s a reasonable argument that stocks’ rally to date has been too narrow – focused only on mega-cap names that play into surging enthusiasm about artificial intelligence. But this argument has weakened as breadth expands and more stocks begin to participate in the rally. Small-cap stocks as measured by the Russell 2000 are also up double-digits from October lows, for instance. What will matter most to stocks from here, in my opinion, is how U.S. economic growth in the coming quarters measures up to past and current expectations. The broad consensus is that a recession is looming, but just about everyone has been wrong about this point so far. As seen in the Q2 2023 GDP forecasts from the Atlanta Fed (GDPNow) versus the top and bottom 10 economic forecasts (chart below), the U.S. economy is likely going to outperform what almost everyone expected in Q2. This outperformance has been happening for almost a year now. [MOTM_07012023_graph2] Source: Federal Reserve of Atlanta 4 Markets tend to respond positively to ‘better-than-expected’ scenarios, and vice versa. If the U.S. economy continues to expand even just modestly in the second half of the year, supported by a resilient jobs market, falling inflation, and steady consumer spending, then I would expect this market rally to continue apace – perhaps even more strongly than many expect. Conversely, if the U.S. economy sputters in the second half or early 2024, and suffers a recession that is deeper and longer than economists are currently anticipating, then I would see a case for the market retesting October’s bear market lows. I certainly would not rule out this possibility, but I also think it’s the least likely to occur. The final scenario is the possibility that a U.S. recession is more of a ‘garden variety’ economic contraction – a slight pullback in output coupled with modest increases in the unemployment rate, say to 5% - 6% or so. If that were to be the case, I would argue that the stock market would not be negatively surprised. This is the type of recession I think was already baked into stocks’ decline in 2022, so it would just be the realization of what stocks were pricing in for the economy last year. Bottom Line for Investors As laid out above, what I think matters most for markets today is whether a U.S. economic recession turns out to be worse, better, or largely in line with what investors, economists, and market watchers are expecting. The only scenario I see as negative for stocks is if a downturn is deeper and longer than expected, which I also do not think is likely. Any other outcome – even one where the U.S. economy enters a mild recession – should not have a meaningful negative impact on stocks. This is also why I think the outcome of the next few Fed meetings is largely inconsequential, and why I think investors should move on. Whether the Fed raises rates by another 25, 50, or even 75 basis points is not likely to alter the direction of the U.S. economy in the next year, which I think means investors should place focus elsewhere. Earnings forecasts for 2024 are a good place to start. Instead of focusing too intently on Fed rate raises, I recommend keeping an eye on key data points and fundamentals that could have an impact on the market. To help you do this, I recommend reading our [Just-Released July 2023 Stock Market Outlook Report](. This report will give you deeper insight into the following: - Zacks June view on equity markets - Setting U.S. returns expectations for 2023 - Zacks Rank S&P500 sector picks - What’s alive for 2023 pessimists - And more… If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! 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