Pro Perspectives 4/16/24





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April 16, 2024

Jerome Powell made some prepared comments today at a "fireside chat" with the head of the Bank of Canada.
He called the economy "quite strong."  He called the labor market "very strong."  And he said the recent inflation data has "clearly not given us confidence" that it's sustainably moving toward their 2% target. 
And with that he says it's "likely to take longer than expected to achieve that confidence." 
So, today Jerome Powell intentionally dialed down expectations on rate cuts. 
Let's take a look at the evolution of the market expectations on the rate path since October of last year, when Powell signaled the end of the tightening cycle. 
As you can see in the chart below, the market had priced in six rate cuts by the end of 2024 (with a chance of seven).  Now it's pricing in just one cut by year end
That expectations change is effectively tightening policy.
Add to that, we've talked about the correction that's underway in stocks.  Declining stocks will also contribute to the tightening of financial conditions.
The chart below shows where stocks were trading when rate cut expectations were at peak (i.e. expectations of greater than six cuts for the year).  That was early January. 
That's 9.4% away from the April 1st peak in S&P futures.  The peak-to-trough drawdown at the moment is 4.8%.
Given the adjustment in rate expections, and the headline risk with Israel/Iran, it's fair to expect a deeper correction for stocks.  In fact, based on historical performance of the S&P 500 we should expect intra-year corrections, on average, of better than 10%.  
Below is an excerpt from a study done by Calamos (investment manager).  As you can see, even in the late 90s boom for stocks, there was a greater than 10% correction in three of the five years (all finished UP, big).