It appears that Federal Reserve chair Jerome Powell’s hints of interest rate cuts last December have driven market professionals to throw caution to the winds. Analysts note that markets have been pricing in a number of rate cuts despite warnings from the US central bank to move with caution.
But why is this so? Jim Smigiel, chief investment officer for London-based financial services firm SEI, opines that it is the way investors and market analysts look at the situation.
Smigiel pointed out that, despite the numerous rate hikes implemented by the Fed, markets did not appear to be fazed. Indeed, it was notable how markets rallied by up to 20%, driven by numerous factors, including the emergence of artificial intelligence as a prime mover of the information technology sector’s progress.
He further stated that different markets look at the current state of the US economy in different ways. The bond market, for one, has a more pessimistic outlook than that of the equity market. This is due to the fact that bond professionals are looking at the economy from a stimulus standpoint. That said, it expects something of a slowdown in economic activity, one that equity investors are not taking into consideration.
It may well be said that those playing the bond market remain skeptical and see any rate cuts factored in as stimulus cuts rather than a means of normalizing market activity. Despite this, or possibly because of this, equity markets are taking a highly optimistic view for the year ahead as these cuts enable their valuations to remain at specific levels.
Also, despite some forecasts of the economy hitting double-digit growth in terms of earnings, Smigiel advises people to err on the pessimistic side as he feels that it is unlikely that the US will reach such levels given current economic circumstances both domestically and globally.
