Climate change, deadly wars, and the proliferation of potentially job-ruining artificial intelligence are several of the biggest topics being chatted about at this year’s World Economic Forum (WEF) in Davos, Switzerland.
But they aren’t necessarily the hottest — that could be reserved for what the Federal Reserve may or may not do with interest rates in 2024. Why, you ask?
The stock prices of many of the large companies attending Davos are trading at or near records in part due to expectations of several rate cuts this year. With lower interest rates — as goes the logic — comes the potential for higher return on investment amid lower financing costs.
“Our team has four [rate] cuts next year and four cuts in 2025,” Bank of America (BAC) CEO Brian Moynihan said on Yahoo Finance Live at WEF on Tuesday. “And so that gets you down in the 3 to 3.25% range — so that will feel quick.”
At its final policy meeting in late December 2023, the Federal Reserve held its key interest rate steady for the third consecutive time at 5.25% to 5.50%. Committee members jotted down at least three rate cuts this year in quarter point increments.
In typical form, investors read into the Fed’s comments as more than three rate cuts — justifying higher stock prices.
For her part, Guggenheim Investment Management chief investment officer Anne Walsh told Yahoo Finance Live that she sees six rate cuts in the cards this year. The reason: an economic growth slowdown that weighs on inflation further, possibly leading to a mild recession.
“We’re just a little bit more concerned that the economy will slow down more than that soft landing view,” Walsh says.
But since the last Fed meeting, US economic data and Fed commentary hasn’t supported the view of aggressive rate cuts and bullish stock bets.
December’s Consumer Price Index (CPI) rose 3.4% year over year, a quicker pace than the 3.1% increase in the prior month.
Various Fed members such as Christopher Waller have tamped down rate cut talk.
And JP Morgan (JPM) CEO Jamie Dimon warned on his latest earnings report that inflation may prove stickier than market participants expect.
The outcome on rates, in the end, remains wildly unknown. To be sure, the answer to the question won’t be solved at Davos.
Experts on the ground tell Yahoo Finance that more caution on markets could be warranted in the near-term, pending more rate clarity.
Guggenheim’s Walsh thinks allocating more cash to fixed income makes sense right now.
“Fixed income has historically done very well when the Fed has paused and begins their easing cycle, which is exactly where we find ourselves. And so if we’re going in that direction, fixed income, particularly investment-grade fixed income, is going to perform very well in that environment,” notes Walsh.
Brian Sozzi is Yahoo Finance’s Executive Editor. Follow Sozzi on Twitter/X @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations, or anything else? Email brian.sozzi@yahoofinance.com.
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