Anxious about the stock market's performance? Here's a potential action to consider when shares rapidly fall.
The business section of CNN first published this tale in their Before the Bell newsletter. Want to join the club? Sign up here. You can also listen to the newsletter by clicking the same link.
The market has been on a wild ride in the year 2024, with strong corporate earnings and AI advancements pushing it higher. However, concerns regarding unexpectedly high inflation reports and economic data have challenged this rally, causing fears that the Federal Reserve might delay rate cuts longer than anticipated.
Last week, the S&P 500 and Nasdaq Composite indexes both recorded multiple record closes following cooler-than-expected inflation reports in May. These reports sparked optimism on Wall Street that inflation may be decreasing again.
Despite this, the Fed maintained interest rates at their current levels on Wednesday and hinted at only one cut for the year, fewer than the three cuts previously forecasted. Traders anticipate the Fed to initiate rate reductions as early as September, according to the CME FedWatch Tool.
If inflation appears to be cooling but the Fed is expected to keep its primary lending rate steady for a more extended period, what does this imply for the stock market?
Before the Bell conversed with Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions, to gain insights.
This conversation has been shortened and clarified for your convenience.
Before the Bell: What is your primary takeaway from last week?
Jack Janasiewicz: The central idea ... is that there’s a deflationary influence on the move. I believe [Fed Chair Jerome] Powell was right to view [the hotter-than-expected] January, February, March inflation data as possibly an anomaly or a pause, not a reversal of the trend that’s headed towards the 2% goal. So, heading in the right direction, it may be slower than people would prefer. But we’re inching towards 2%.
Additionally, the labor aspect of their mandate is gaining more attention. The Fed is one of the few central banks with the dual mandate of price stability and full employment. It appears that the emphasis on price stability is becoming clearer. As the economy slows a bit here, and joblessness starts to tick up, the Fed [may start focusing] on preventing the unemployment rate from rising.
This could be the catalyst for rate reductions. Therefore, we’re not writing off rate cuts by September. We could very well have a cut. The data will inform us on this, but I believe the key takeaway for us is [inflation] heading in the right direction.
What does this mean for stocks?
This is a seemingly perfect scenario for stocks where inflation is trending lower while still being slightly above the target, which will benefit corporate profits and the economy. Even if we see a slowdown, keep in mind that we’re starting from an above-average growth rate. If we slow down to the normal pace, it’s still a solid foundation. This is ideal for corporate earnings, and that's, unsurprisingly, why the market continues to perform well.
I wouldn’t be astonished if we experience a pullback, but the underlying economy is still quite robust. Our advice to our clients is that any temporary decline, like a 5% or 10% drop in equities over the next month or two, should be seen as an opportunity to invest more, not as a reason to reduce risk.
Will some of the money on the sidelines enter the stock market?
Some of it will return, but not all of it, because money market accounts are still offering a decent return. People usually keep cash as cash and view it as a distinct bucket. As a result, swapping that bucket for an equity risk isn't very straightforward.
However, some of it will likely return to the markets. Many of our clients remain defensively positioned, as they don’t trust the market rally and believe that the economy will eventually slow. Consequently, there is still space for some of this money to flow back into the markets, but some of it might remain quite persistent.
These cities are now beyond affordable, categorized as ‘impossibly unaffordable’
If you've half an eye on the housing market over the past two decades, you'd know that in numerous countries, including the United States, it's become increasingly difficult to purchase a home.
A new report sheds light on the feelings of many potential home buyers by creating a category called “impossibly unaffordable,” as reported by my colleague Hilary Whiteman.
The report compared median incomes with average home prices. It uncovered that pandemic-driven demand for homes with open spaces, restrictive urban land use policies, and investors flooding markets have caused prices to soar.
US cities on the West Coast and Hawaii occupy five of the top 10 most unaffordable locations, according to the annual Demographic International Housing Affordability report, which has been tracking house prices for 20 years.
Unsurprisingly, the most expensive U.S. cities to buy a home are in California, with San Jose, Los Angeles, San Francisco, and San Diego all making the top 10.
The Hawaiian capital of Honolulu also grabs our attention in sixth place of the 94 major markets surveyed in eight countries.
England, alongside the U.S., takes the lead in the "unimaginably expensive" list, with cities like London, Manchester, and Newcastle upon Tyne making the cut. Check out more details here.
The intriguing alliance between Apple and OpenAI
Recently, OpenAI's CEO, Sam Altman, paid a visit to Apple's annual developer gathering, where he interacted with current and former bigwigs, including Apple co-founder Steve Wozniak. Just hours after this meet, Apple declared a long-hyped partnership with OpenAI, aiming to bring ChatGPT's technology to their devices by year's end.
However, Altman, who has become the face of generative AI after the launch of ChatGPT about 1.5 years ago, was missing from Apple's formal demonstration—either in person or via live stream. He also avoided joining Apple CEO Tim Cook and other execs for a closed-door event focusing on privacy, security, and the partnership between the two firms, as reported by Samantha Murphy Kelly from the team.
Ben Wood, an analyst at CCS Insight, commented on this, stating, "I wasn't surprised to see Sam Altman absent from the stage. Apple had to maintain a careful message. OpenAI is simply a means to address broader AI-related queries that are non-essential to Apple’s user experience. Having him on the livestream would have only led to an unnecessary level of perplexity."
Previously, Apple showcased several AI- boosted features coming to iPhones, iPads, and Macs this fall—with most of these advancements driven by Apple Intelligence, their own homegrown technology.
Apple plans to use OpenAI's viral ChatGPT tool in a minimal capacity, primarily when Siri requires additional help in addressing a query.
This decision to invite Altman but keep him off the public stage can be seen as a reflection of Apple's cautious approach to the partnership.
Read more here.
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In light of the Fed maintaining interest rates and expecting only one rate cut for the year, investors may need to reconsider their investing strategies in the business sector. This could potentially impact the stock market's performance, as lower interest rates often stimulate economic growth and investment.
Considering the current market trends and the realization that some of the money on the sidelines might return to the stock market, now could be an opportune time for individuals interested in business investing to consider diversifying their portfolios.
