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No Landing

Exterior of United States Department of Treasury

The Federal Reserve held interest rates steady today, citing recent inflation setbacks. This extended a wait-and-see posture that could last well into the year. The decision to leave the benchmark federal funds rate between 5.25% and 5.5% was widely anticipated. So, can we stop debating landings? We have all grown tired of reading about “soft landing” and “hard landing” fears. In reality, we won’t get a distinguishable “landing.” Life will move forward and on to the next fear.

Notably, economic expectations continue to remain overly dour. Many on TV and in print state that continued rate hike pain hurts growth. Yes, rate-sensitive pockets of the US economy, like real estate, have shown weakness. So has Silicon Valley, with low numbers of new startups. Clean energy is also lagging, falling nearly -60% from January 2021’s high on credit reliance and some hype tied to government policy. But, it’s essential to recognize that North American economies have shown resilience despite the challenges.

In 2022 and 2023, US businesses proactively made cuts anticipating a recession, which was instrumental in allowing for a soft landing. Now, it’s time to shift gears and look forward. Firms will likely transition from a defensive stance to an offensive one, encouraging reacceleration.

Understandably, “higher-for-longer” rate fears likely contributed to 2023’s late-summer correction, but as we all saw, expectations soon changed. Annoyingly, the “higher-for-longer” fears are back, with many tying recent volatility to rumors the Fed might not meet rate cut expectations this year. So, what? Rate cuts don’t matter as much as many think, and this point was proven when the Fed hiked rates 75 basis points at the bottom of the bear market, which ended in October 2022, and then raised rates five more times through August 2023. Said differently, stocks began to rebound during and through six rate hikes—markets can increase despite central banks raising rates.

More importantly, the rate cut conversation surrounds what central banks will do in the next couple of months, but stocks rarely look that short-term. Markets generally look forward 6–18 months and measure how reality compares with current expectations. So, it seems unlikely that “when” the Fed makes its first cut, it will mean much to corporate earnings in this longer window, which stocks primarily care about. Any rate cut timing debate may be a big deal for headlines, but for stocks, markets don’t need a rate cut to move up.

So, continue to look forward and enjoy the new bull market because the outlook is promising. We are in the second year of this bull market, which is experiencing healthy and normal volatility. Sentiment is improving, and although it remains largely skeptical, it leaves ample room for positive surprises later in the year. Political factors are also in our favor. With US equities historically performing well in presidential election years and global political uncertainty diminishing, it helps pave the way for more robust returns later in the year.

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