Daniel Grzelj
US stock markets performed well during the month of May, although they went through a down period that looked a bit ominous.
The S&P 500 rose from 5,035.69 on April 30, 2024, to close at 5,277.51 in May. 31, 2024.
The historical high for the S&P 500 is 5,321 and was reached on May 21, 2024.
Here is a picture of the rise of 4.8 percent.
S&P 500 Stock Index (Federal Reserve)
Over the course of the month, the Dow Jones Industrial Average rose 2.3 percent in May and the Nasdaq rose 6.9 percent.
As can be seen from the chart, in the latter half of May, the stock market moved essentially sideways with two or three days showing significant declines.
What seemed to be happening?
Lately, investors seem to be wary of the Federal Reserve The European Central Bank has not cut interest rates this year.
The cause of any delay was laid at the feet of the demon of inflation.
For much of the month, investors were concerned that the inflation picture was not positive, meaning that the possibility of the Fed cutting interest rates would remain at its current level or… as some suggested. …maybe raise the interest rate.
On Friday, after two days of decline, stocks opened higher.
The reason was that on the Friday morning before the markets opened, information was released about the Fed’s preferred price index, the Personal Consumption Expenditures Price Index or PCE.
News, the personal consumption expenditures price index rose only 2.7 percent during April 2023.
This increase, according to Charlie Grant in the Wall Street Journal, “was in line with the expectations of economists surveyed by the Wall Street Journal.”
The core price index rose 2.8 percent year-on-year, slightly above expectations of 2.7 percent.
Mr Grant added: “The new price data follows news that the economy grew at a lower rate than previously thought at the start of the year.”
This information influenced investors’ views on the possibility of the Fed cutting interest rates. Now, Mr. Grant tells us, investors believe there is an 81% chance the Fed will cut rates at least once before the end of 2024.
So, investors moved, and the stock market rose… on expectations that the Fed will cut interest rates at least once before 2024 is complete.
That’s it, people!
The Fed will keep stock prices at these high levels…or even higher.
To Lydia DeBellis, who writes for The New York Times about the state of the economy and the future of inflation,
“Spending remains healthy… The stock market has been strong and home prices are high, giving affluent consumers the confidence to take lavish vacations and buy new cars, even as delinquency rates rise for those who have maxed out credit cards.”
“Consumers are borrowing because they can, because their balance sheets are healthy.”
“The wealth effect makes them believe they can do it.”
Thus stock markets rise.
To me, the critical phrase here is that “consumers borrow because they can…”
Please note my recent post entitled Watching the Fed: “Too Much Money Out There.”
The Federal Reserve has put money into the economy. A lot of it is still there.
But the rest of the year will be dominated by the presidential election. The key question is: What will the Fed do with the upcoming election?
My response to this is that Fed officials don’t want to cause a sudden drop in the stock market, the financial markets.
I’ve written a fair amount about this issue.
With the presidential election looming, Federal Reserve officials want to avoid making any kind of decision that would cause the stock market to crash… or move in a way that makes investors think officials are acting in a way to re-elect the incumbent president.
This means that we are entering a period of time in which Federal Reserve officials want to keep a low profile as much as possible.
Officials hope they can handle “more of the same.”
That is, Fed officials want to disappear until the end of November… or even later if possible.
Fed officials want the Fed to become invisible.
Stock markets and other financial markets have been relatively quiet for most of this year.
If they could just stay quiet for the rest of 2024… I think most Fed officials would like that.
I think Fed officials would like to continue the rest of the year without changing interest rates. I think a rate hike is a real “no, no.” Moving it down…maybe…but don’t worry too much.
Fed officials have already said they will continue to reduce the size of the Fed’s securities portfolio. They also said they would likely reduce the size of the Fed’s monthly reduction in the size of its securities portfolio.
But the Fed will still try to keep the “cash reserves” of the commercial banking system relatively stable, and manage these “excess reserves” to keep the market calm and stable.
I firmly believe this is what Fed officials want to achieve for the rest of 2024.
This should help Fed officials get through the presidential election without shifting the blame on their shoulders.
They may be “blamed” for something anyway, but they want to keep their “plates clean” so they can forcefully argue that they did nothing to influence the outcome of the election.
My feeling is that this would make monetary policy for the next six months the same as the monetary policy for the first five months of 2024.
In the first five months of 2024, the S&P 500 stock index rose 10.4 percent.
Not too shabby.
I’m sure Fed officials will accept another increase of 10.0% or so in the second half of 2024.
Yes, the Fed can be accused of working for the incumbent president, but they can repeatedly point to their statistics that they have done nothing more than continue the policy they have followed since March 2022.
I think that’s what the Fed will do going forward.
If there are no major disruptions to the economy in the latter half of 2024, I think the Fed could get that kind of market response.
Most important of all, Fed officials want to get investors… and the public… to try to anticipate every move they might make over the next five months.
Fed officials…want to get out of the headlines.
