top of page

Investing is Not Always Smooth Sailing

We saw mostly smooth sailing through the first three months of 2024.


However, April smacked investors with volatility and a giveback of some of those first quarter gains.  Make no mistake… interest rates were the culprit.  It wasn’t a policy move by the Fed, but more about what inflation might prevent the Fed from doing.  The reaction included closely watched 10-year Treasury yield, which floated up in the 1st quarter, surging higher in April, resulting in a stock pullback.


But why?  The threat of a turnaround in the trend of inflation pushed hopes of a Fed interest rate cut further into the future.  This, in turn, pushed yields on the 10-year markedly higher.  As April closed expectations for a single Fed cut moved from September to December.  Oh, how quickly expectations have changed… at year-end, 6-7 cuts were expected during 2024.


Recent inflation readings are tying the Fed’s hands.  For example, the Core Personal Consumption Expenditures price index, the Fed’s preferred inflation measure, rose 2.8% year-over-year for March, above the expected 2.6% and a reading that was the same as February.  The recent lack of progress on inflation is not giving the Fed the confidence they’re looking for that inflation is reliably heading to their 2% target.  Therefore, the policy making committee does not think they can cut at this time. 


Powell’s remarks were perceived as less “hawkish” than anticipated, and the market rallied after Fed Day.  The problem with the “higher for longer” scenario is that it is not helpful to the US economy that is starting to show signs that it might be on the verge of slowing. 


Some of the data releases that have come in lighter than expected include job openings, jobs added, construction spending, and both ISM PMI reports.  Looking closer a recent employment report, the non-farm payroll figures for April showed 175,000 new jobs.  That’s a notable decrease from the previous month’s 315,000 and below the expected 238,000.


Chair Powell basically took the threat of a Fed hike off the table recently, and any good inflation news should encourage talk of Fed cuts. Yet as we’ve seen in May, interest rate moves affect stocks in both directions.  Early signs of economic slowing and less hawkish Fed have pushed the 10-year Treasury yield down about 25 basis points, and stocks have pushed higher rebounding from a poor April.  Looking ahead, if the trend of lower inflation resumes this will help pave the way for lower interest rates across all maturities and further gains in stock and bonds. 


You should expect the volatility to continue for a while due to the prevailing uncertainty.  But stocks and bonds should eventually react well to lower interest rates later this year.  After all, interest rates are driving the bus.


bottom of page