Bi-MONTHLY MARKET ANALYSIS &

ECONOMIC UPDATES

April 4, 2024

6? 3? 1? No Cuts? A Rate Increase!?

When will the Fed cut interest rates? How many times will they cut rates? Will the Fed cut rates at all? Will the Fed raise interest rates? The Fed raised rates 11 times between March 2022 and July 2023 to combat ongoing inflation. Certainly, the main focus on Wall Street now is the reversal of the Federal Reserve’s policy on interest rates. The number one question is how many times will the Fed cut rates. Question number two is when.

The Federal Open Market Committee (FOMC) meets eight times a year to discuss whether to adjust the federal funds rate, a benchmark that governs overnight lending between commercial banks. Led by Federal Reserve Chair Jerome Powell, the group of 12 considers inflation, employment and the rate of borrowing, among other economic factors.

As recently as late January the futures market was discounting at least six 25-basis-point cuts this year. Some seven (7) times. Street consensus then dropped to an expectation of three Fed rate cuts this year in March. More recently, there has been an increasing forecast of just one. What about none? That is also an expected possibility. An about-face is the notion of an interest rate increase this year.

Expectation Deceleration – –

For most of last December and January, investors expected the Fed’s March meeting to deliver the announcement of its first rate cut, effectively concluding the current tightening cycle. Markets inferred a dovish message from the Fed’s early year comments, economic projections, and a press conference from Federal Reserve Chair Jerome Powell. The greatest odds implied by futures pricing were for a year-end 2024 fed-funds rate in the range of 3.75% to 4.00%. That would mean 1.5 percentage points of reductions in the Fed’s target next year, or six cuts of a quarter-point each. A March rate cut was highly expected. Leading up to that meeting, the implied probability that the Fed would lower rates was 90%. As the meeting date neared, However, futures-market pricing pointed to a target rate of around 4.00% to 4.25% by year end, which would mean four or five quarter-point cuts. No rate cut came.

Not only was there not a rate cut in March, but the Fed quickly changed Wall Street’s mind with their comments after the meeting. The FOMC members updated their projections for future interest rates reflecting a median estimate for the federal-funds rate to end 2024 at 4.6%—implying three quarter-point cuts. Though not six, the Fed’s signal in March that they expected to cut their key interest rate three times in 2024 sparked a market rally.

The FOMC has six more opportunities to cut interest rates this year, starting with its next meeting at the end of April/May 1. As predictions for rate cuts have dropped from 6 to 3, now there’s a growing call for just 1. Yesterday Federal Reserve Chair Powell spoke at Stanford University. He offered comments on the Fed’s economic outlook. “Recent readings on both job gains and inflation have come in higher than expected,” Powell said in a speech to the Stanford Graduate School of Business. While policymakers generally agree that rates can fall later this year, he said this will happen only when they “have greater confidence that inflation is moving sustainably down” to the Fed’s 2% target, he said. In separate comments yesterday, Atlanta Fed President Raphael Bostic said, “rates should likely not be reduced until the fourth quarter of this year.” Bostic anticipates only one quarter-percentage-point cut will be appropriate in 2024. “I think it will be appropriate for us to start moving down at the end of this year, the fourth quarter,” he said.

No Interest-Rate Cuts in 2024? – –

Shocking as it would be to see no Fed rate cuts in 2024, that non-consensus outlook shouldn’t be ruled out. Especially in light of recent poor economic forecasts have gone awry. Think of the “100% probability” of a 2023 recession seen by Bloomberg Economics in October 2022. The Fed itself declared inflation merely “transitory” in March 2021, and conventional wisdom was inflation would drop by the end of the year.  The call for 6 rate cuts this year (let alone 7) shares space with those other inaccurate predictions. In the period after the financial crisis of 2008-09, the market was consistently early in discounting the liftoff in the fed-funds rate. As it turned out, the initial hike didn’t come until December 2015. So, it wouldn’t be unprecedented for the market to be premature again in its expectations for a pivot in Fed policy.

A rate hike? – –

Not a single official on the FOMC now expects that the U.S. central bank’s most forceful inflation fight in 40 years will require another rate hike, according to projections released along with the Fed’s March rate decision. The sentiment points to the likelihood that the Fed’s key borrowing benchmark peaked when it reached a 23-year high of 5.25-5.5%. As of today, 0.0% probability of a rate hike in 2024, including the Dec 18, 24 meeting.

Wall Street doesn’t like negative surprises. It shouldn’t be surprised, though, as the Fed is “data dependent”. So, if we keep our eyes on the economic data, we won’t be surprised at any Fed interest rate policy change.

Proper Perspective:  In our hectic and often hard to comprehend world, it is very easy to lose perspective. You may agree it is sometimes difficult to see the big picture. The media often doesn’t help with this, but unfortunately instead encourages us to see things in a most negative light. Here is hopefully a pause to gain positive perspective.

“I claim not to have controlled events, but confess plainly that events have controlled me.”

~~Abraham Lincoln, 1864

What Happened On This Day April 4, 1818 – Congress adopts the flag of the United States, with 13 red and white stripes and one star for each state.

INDICATORS OF INTEREST:

• Market’s Current Signal: Market in Confirmed Uptrend.  Analysis of the stock market over 130 years of history shows we can view it in terms of three stages – market in uptrend, uptrend under pressure and market correction. I analogize this to a traffic signal’s changing colors from green to yellow and then to red. It is still green. Since the 1880’s, this perspective has led to investment out-performance relative to market indexes. This is due to trend analysis which determines risk reducing, return enhancing market entry and exit points.

The Stock Market Trend: Market in Confirmed Uptrend. Since November 1 the market has been in a confirmed uptrend. The market’s technical’s and fundamental’s remain solid and support the market’s extended Confirmed Uptrend. The market is now up 18 out of the last 22 weeks.

Here are key market levels as of Monday, April 1:

Recapping Last Week

U.S. equities ended a shortened week with mixed performance but posted the strongest first-quarter returns since 2019. The S&P500 and Nasdaq Composite indices were little changed on the week, while the Russell 2000 jumped 2.5% on optimism for potential interest rate cuts. Nine of 11 S&P500 sectors posted gains, led by the two interest-rate sensitive sectors: real estate and utilities. Crude oil prices climbed 2.7% to $83 per barrel, while gold futures surged 3.5% to close at another all-time high. U.S. Treasury yields were moderately lower in a week that lacked impactful economic data. The biggest news of the week came Friday, with U.S. markets closed. February’s core PCE reading came in at 2.8% year-over-year and 0.3% month-over-month (MoM), both in line with expectations. Inflation pressures continued to come from the goods side as opposed to services, as consumer spending jumped 0.8% MoM. The numbers weren’t exactly what the Fed would like to see but may not be too surprising when markets reopen Monday. In other economic news, the third and final reading of Q4 2023 GDP was raised to 3.4% from 3.2%, reflecting the strength in consumer spending. U.S. consumer confidence was essentially unchanged in March, with recession fears fading but upcoming election anxieties growing. Inflation expectations stayed near their lowest level in four years despite the uptick in CPI readings this year. The University of Michigan’s consumer sentiment index was revised sharply upward in late March, buoyed by a strong stock market and an easing inflation outlook. U.S. factories were bullish on economic conditions, as durable goods orders increased 1.4% in February, while core capital goods orders rose 0.7% after falling the prior month. Sales of new U.S. homes slipped in February, with the median price falling to $400,500, down 19% from the October 2022 peak. Meanwhile, the supply of new homes rose to 463,000, their highest point since the same price peak.

Internationally, the Summary of Opinions from the Bank of Japan’s recent meeting indicated that Governor Ueda and fellow board members are likely to take a slow approach to further rate hikes. In Australia, consumer confidence fell in March, with households less optimistic about rate cuts. Their February CPI was unchanged at 3.4% year-over-year (YoY); however, core inflation ticked up to 3.9% YoY. Finally, Germany’s retail sales were much softer than expected in February, highlighting the weakness in consumer spending for Europe’s largest economy.

Current View

The stock market remains in a decent uptrend, despite the 30-stock Dow average on pace for its worst weekly loss since October as of yesterday’s close. Even in yesterday’s dull day for the indexes, remarkably, at least 27 of the 197 industry groups I track rose 1.5% or more for the day. The sectors ranged from oil and gas and gold to computers, heavy construction, transportation and leisure. We have a bullish market condition – broadening participation.

On Friday, the nonfarm payrolls and unemployment report for March hits computer screens. Portfolio managers will once again focus on revisions to past numbers as well as indications that wage growth, a key component in overall inflation figures, continues to cool.

The yield on the key U.S. 10-year government note gave up midsession gains and finished at 4.35%, off 1 basis point — one day after it closed at the highest level since November27.

Both the bulls and the bears are awaiting a new catalyst in which to take charge. Will first-quarter earnings news fit do it, or will it be Friday’s jobs report? We’ve had three quarters of year-over-year earnings growth. So, the earnings momentum is turning positive. Good news on the jobs front could be bad news for stocks. Strong economics reduce chances of a Fed rate cut.

• Industry Group Strength:  BULLISH. As of yesterday, 138 out the 197 groups I monitor are up year-to-date. 59 are down.
• New Highs vs. New Lows: BULLISH.  In yesterday’s session, there were 336 new 52-week highs and 88 new 52-week lows.
• Dow Dividend Yield:  BEARISH. The current yield for the Dow Jones Industrial Average is 1.93%. The 10-year Treasury now 4.36%.
• Volatility Index: BEARISH. Volatility has been volatile. The “VIX” is now 14. The index is also known as the “Fear Index.” It is considered a contrarian indicator and therefore viewed as bullish as it rises indicating investors are becoming more fearful. The VIX:

• Fear / Greed Index: BEARISH.  Investors are driven by two emotions: fear and greed. Too much fear can create a condition of oversold/ undervalued stock prices. Too much greed can result in overbought/overvalued stock prices. The AAII Investor Sentiment Index is now neutral.   BE FEARFUL WHEN OTHERS ARE GREEDY. At 67, the Fear & Greed Index is down from 76 two weeks ago.

CLICK VIDEO FOR MORE ON THE “FEAR & GREED INDEX”

How CNNMoney’s Fear & Greed Index works

• Bull / Bear Barometer:  BEARISH. This secondary market indicator should also be viewed with a contrarian perspective. As of yesterday, according to the latest survey of stock market newsletter writers by Investor’s Intelligence (see below), bullish sentiment is 62.5%. This is up from 60% 2 weeks ago. The bear sentiment is now 14.1%, down from 14.7% a month ago. Consider this a contrarian indicator because the crowd is often wrong at market tops and bottoms. In other words, extreme bullishness has been seen near several market tops in the past, while extreme bearishness has been seen at market bottoms.  Note how close market sentiment is near the 5-year bullish high and near the 5-year bearish low…

• Put / Call Ratio: BEARISH. The ratio of put-to-call options is 0.53.  The put-call ratio tracks the mood of what options investors are doing, not just saying. They typically buy puts if they think a stock will decline and calls if they think it will rise. If they’re buying lots of puts, they see the market declining. And if they’re loading up on calls, they’re generally bullish. Historically, market bottoms occurred when the reading spikes to 1.2 or more. Market tops are often made when the reading is 0.6 or less. Note how reliable this is with respect to the February record low coinciding with the market high. Keep in mind this is also a contrarian indicator.

Global Economic Indicators & Analysis:

POSITIVE INDICATORS

ADP Jobs Numbers Spike: American businesses added 184,000 new jobs in March, the biggest jump in hiring since July, paycheck company ADP said yesterday. Economists polled by the Wall Street Journal had forecast a gain of 155,000. The ADP data showed that wages were heating up. Wage gains for job changers rose sharply to 10%, the second straight increase. The ADP data help set the tone for expectations in financial markets ahead of the key nonfarm-payrolls report, coming up Friday.

Job Openings Show Strength: The number of job openings in the U.S. totaled 8.8 million in February for the second month in a row, showing a labor market with plenty of residual strength. Job openings have shrunk from a record 12 million in 2022. Many openings are never actually filled, but the trend in job postings gives clues on the health of the labor market and the broader economy. New openings are still much higher now than they were before the pandemic started in 2020. The jobs market isn’t red hot like it was a few years ago. Yet plenty of jobs are available, lots of companies are still hiring and unemployment is very low.

Factory Orders Rise: Orders for manufactured goods rebounded 1.4% in February after two straight monthly declines, the Commerce Department said Tuesday. According to the report, durable-goods orders rose a revised 1.2% in February, down slightly from the advance estimate last week of a 1.4% gain. Non-durable goods orders rose 1.6% in February after a 0.8% drop in the prior month.

ISM Index Turns Positive: A barometer of business conditions at U.S. manufacturers turned positive in March for the first time in 17 months, in another sign that the industrial side of the economy is on the mend. The Institute for Supply Management’s index of manufacturers rose to 50.3% in March from 47.8% in the prior month. Numbers above 50% are viewed as positive for the industrial side of the economy. The index had fallen for 16 months in a row. Manufacturers have been mired in a slump of sorts for almost a year and a half because of high inflation, rising prices and a shift in consumer spending patterns to favor services such as travel and recreation. Yet the prospects of a full-blown recovery are improving amid expectations the Federal Reserve will reduce borrowing costs later this year and boost demand.

Consumer Spending Rebounds: Consumer spending in the U.S. rebounded in February after a lull at the start of the year, suggesting consumers still have plenty of buying power. Household spending rose a solid 0.8% last month to mark the biggest increase in 13 months, the government said last Thursday. Outlays rose a smaller 0.2% in the first month of the year. Consumer spending is the main engine of the U.S. economy. Households have kept spending at a relatively strong pace despite higher interest rates for houses, cars and other big-ticket items.

Consumer Sentiment Climbs: The final reading of consumer sentiment in March rose to a 32-month high, as Americans expressed more confidence that inflation would ease and reduce the financial strain on households. The second of two readings of the consumer-sentiment survey climbed to 79.4 from an initial 76.5, the University of Michigan said last Thursday. The index is at the highest level since July 2021, but it’s still well below the pre-pandemic peak of 101. A gauge that measures what consumers think about the current state of the economy rose to 82.5, also the highest reading since July 2021.

Pending Home Sales Inch Up: Pending home sales ticked up in February as the U.S. spring home-buying season is underway. Pending-home sales rose 1.6% in February from the previous month, according to the monthly index released last Thursday by the National Association of Realtors (NAR). Pending-home sales reflect transactions where the contract has been signed for an existing-home sale, but the sale has not yet closed. Economists view it as an indicator for the direction of existing-home sales in subsequent months. The housing market is flashing mixed signals of recovery and stagnation. While inventory ticks up and signals that the lock-in effect might be easing and sales may be rebounding, mortgage rates stay near 7%, keeping a lid on home-buying demand.

Case-Shiller Index Hits New High: Home prices in the 20 biggest U.S. metros hit a new high as the housing market deals with an ongoing lack of homes for sale.

The S&P CoreLogic Case-Shiller 20-city house price index rose 0.1% in January compared to the previous month. Over the last two years, homeowners have been the biggest beneficiaries of low inventory, sitting on ultra-low mortgage rates while seeing their homes appreciate significantly. They will likely continue to see home price gains as the housing market still faces a shortfall of resale inventory.

Durable Goods Orders Rebound: Orders for U.S. durable goods rebounded in February with a 1.4% gain and business investment also rose in perhaps an early sign of revival in the manufacturing side of the economy. So-called core also increased 0.7%, rising for the first time in three months. The figure omits defense and transportation and is seen as a proxy for broader business investment. Taken together, these figures suggest U.S. manufacturers might be perking up after a few years of malaise. The manufacturing side of the economy appears to be thawing out after a few years of sluggish demand, but a full recovery is unlikely until the Federal Reserve starts to cut interest rates.

Construction Spending Falls: Construction spending fell in February as U.S. companies and the government scaled back projects amid high interest rates. Spending on construction projects fell 0.3% in February to $2.1 trillion, the Commerce Department reported on Monday. The figure fell short of expectations on Wall Street. Economists were expecting construction spending to rise 0.7% in February. Construction spending is down for the second month in a row. Construction-spending data show how much the government and private companies spend on projects including housing and highways. The more the U.S. spends on construction, the higher the level of economic activity.

PCE Spikes Again: Prices in the U.S. rose sharply again in February based on the Federal Reserve’s preferred PCE index, reinforcing the view that inflation might not slow as much in 2024 as previously believed. The PCE index rose 0.3% last month, the government said Friday. That’s a touch below the 0.4% forecast of economists polled by The Wall Street Journal. The more closely followed core rate that strips out food and energy also rose 0.3%. The core index is viewed as a better predictor of future inflation. The increase in inflation in the PCE report didn’t come as a big surprise. A pair of reports on consumer and wholesale prices that also feed into the PCE index showed sharper increases last month.

U.S Trade Gap Continues to Widen: The U.S. trade gap widened to $68.9 billion, the largest deficit in nearly a year. This is the third month in a row our imports exceeded our exports. A wider trade deficit so far this year is expected to subtract from gross domestic product for the first time since early 2022. While the US trade balance has improved since 2022, the appetite for imported merchandise may stay elevated given resilient consumer spending and inventories that are more in line with sales. Moreover, recession risks in overseas markets are restraining demand for US exports.

Chicago PMI Drops: The Chicago Business Barometer, also known as the Chicago PMI, weakened further in March, dropping to 41.4 from 44 in the prior month. This is the fourth straight monthly decline. The index has been below the 50 breakeven level for most of the last year and a half. It is one of the last of the regional manufacturing indices before the national ISM data for March is released. The ISM has been pointing to weak demand, and it has contracted for 16 consecutive months.

Consumer Confidence Sours: Consumer confidence fell in March to a four-month low as persistent inflation and the 2024 presidential election made Americans more anxious, a new survey showed. The consumer confidence index slipped to 104.7 this month from a downwardly revised 104.8. Consumer confidence tends to signal whether the economy is getting better or worse. Confidence has improved considerably since late last year thanks to slowing inflation, but it’s still well below the pre-pandemic high. A measure that looks at how consumers feel about the economy right now rose to 151.0 from 147.6 in the prior month. A confidence gauge that looks ahead six months, however, declined to a five-month low of 73.8 from 76.3 n the prior month. The economy is fine by most measures. Businesses are still adding jobs, unemployment is low, wages are rising and the stock market is booming. Yet inflation is still running at excessively high levels and gas prices have risen to give Americans more to worry about. The pending presidential election has also made people anxious, polls show.

New Home Sales Slightly Dip: Sales of newly-built homes in the U.S. fell slightly in February, as mortgage rates inched up. U.S. new-home sales fell 0.3% to an annual rate of 662,000 in February, from a revised 664,000 in the prior month, the Commerce Department reported last Monday. The number is seasonally adjusted, and refers to how many homes would be built over an entire year if builders continue at the same pace every month. Though the February data revealed a drop in new-home sales, likely due to an increase in mortgage rates, the sector remains the brightest spot in the U.S. housing market.

John J. Gardner, CFP®, CPM®, AIF®

Blackhawk Wealth Advisors, Inc.

3860 Blackhawk Rd. Ste. 160 Danville, CA. 94506

Phone: 888-985-PLAN · Email: jg@blackhawkwealthadvisors.com

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For my Market Monthly podcast, click on the link below. I provide a review of global stock market highlights over the past month and preview of the month ahead. Forward insights and perspectives are based on current financial market and economic trends with an emphasis on relevant developments in various areas from Fed policy to company earnings announcements.

Blackhawk Wealth Advisors is the parent corporation of Equity Research & Portfolio Evaluation and Blackhawk Asset Management. It’s Chief Investment Officer is John J. Gardner. John is a Certified Financial Planner (CFP®) and Certified Portfolio Manager (CPM®). As an AIF®, John is also an Accredited Investment Fiduciary.

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