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The bullish euphoria that came from the possibility of a quick return to neutral rates after the Fed’s 50 basis point rate cut in September has dissipated. But another bullish sentiment has taken its place, one we all know very well: the power of a hot economy, which has carried the market all year long – until that cut.
While concerns about inflation and the economic recovery have returned after a string of good data (the September jobs report, the consumer price index, good retail sales and quieter weekly unemployment numbers), the strength has done nothing but boost the market. It has done just fine in recent years (thank you very much), with high interest rates and endless no-landing comments. A warm economy is good for stocks.
All this has kept the S&P 500 hovering around its all-time high all week, now well above 5,800, as the index continues to weather year-end forecasts – and subsequent upward revisions, such as UBS’ 5,850 figure released on Tuesday .
The mood feels different than a month ago. But as our Chart of the Week shows, not much has actually changed in terms of expectations – especially not in a negative way.
The latest Bank of America Global Fund Manager Survey shows that the potential for a soft landing may have diminished slightly. But hard-landing respondents faded just as sharply, falling into the single digits for the first time since June, with just 8% seeing a recession in the next 12 months.
Checking in with CME’s FedWatch tool also shows little change. Belief that the Fed will continue to cut rates in November is still overwhelming, with the instrument showing a 91% chance of a 25 basis point cut on Friday.
It sounds difficult to reconcile these two things – another potentially re-accelerating economy and a rate cut that the market is all but certain to deliver. But that is not the case if you remember how high interest rates still are, as we wrote earlier this week in Chart of the Day. As Minneapolis Fed Chairman Neel Kashkari said this week, interest rates are still restrictive overall.
Jason Furman, former chairman of the Council of Economic Advisers under President Barack Obama, told Yahoo Finance that he sees inflation as a bigger problem than recession right now. But the current Harvard professor mused that while “the Fed needs to be tight on policy, policy just doesn’t have to be as tight as it was last year.”
High – but lower than they were – and longer.
Ethan Wolff-Mann is a Senior Editor at Yahoo Finance and provides newsletters. Follow him on X @ewolffmann.
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