Economic Slowing is Good News, For Now

Federal Reserve Chair Jerome Powell has demonstrated remarkable deftness in navigating the period of heightened inflation that he and the government set in motion in 2021. Since injecting 4.81.6 trillion from the banking system. The general consensus among forecasters, who had predicted an economic downturn and looming unemployment crisis over the past two years, has proven to be off the mark. With the U.S. maintaining full employment for the last two and a half years, the primary investor focus has shifted towards AI and the timing of rate cuts. Long-term inflationary trends have begun to taper off significantly, with the core Personal Consumption Expenditures (PCE) index (excluding volatile food and energy prices) dropping from 5.6% to 2.75% at present. If the PCE stabilizes in the low 2’s by late this year or early 2025, it is possible that the Fed will consider lowering its Fed Funds rate and writing inflation’s epitaph.

Without the housing component, inflation as measured by the popular CPI or the Fed’s broader based PCE has already fallen to 2%. The bad news is that monthly inflation reports have been rising faster the past four months and lower monthly inflation numbers from last year will begin falling off, pushing up the annual rate. This will make it impossible for the Fed to cut rates until at least late this year without an actual economic contraction. Our outlook is for the 10-year treasury yield to stay range-bound between roughly 4% and 5%.

The sharp decline in the Atlanta Fed’s GDP forecast illustrates that economic growth components are slowing faster. This helps to confirm the continued downward trajectory for inflation. Lower inflation increases the odds of rate cuts by year end and is viewed as a tailwind for stocks as long as rates don’t fall too fast. The longer-term Bullish backdrop is likely to be interrupted with a larger stock market correction before the elections if data weakens much further. We expect the Fed and election promises to quickly quell spiking investor fear and create another buying opportunity in this secular Bull market. Our outlook for the SP 500 Index for the rest of 2024 is a range of 4900 to 5550.

As mentioned in last week’s interview, we posted, the economy is healthy, and the inflation dragon continues to lose its fire as fiscal stimulus has plateaued and the Fed keeps its foot tapping the monetary brakes without spiking Recession fears. In this environment corporate profits can continue hitting new record highs with an added investment boom surrounding Artificial Intelligence.

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