Markets are fighting the Fed | CNN Business (2024)

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Stocks have experienced a sharp summer rebound, easing fear among investors and boosting hopes the bear market has settled on an early hibernation. But at any moment, strategists warn, the Federal Reserve could deliver a reality check that jolts complacent traders.

“Markets have [gotten] used to the idea of the Fed riding to the rescue,” Michael Hewson of CMC Markets told me. “I just do not see that happening.”

The S&P 500 climbed almost 12% between the beginning of July and Friday’s close. Wall Street has found relief in a better-than-expected batch of corporate earnings and the slight slowdown in US inflation, bolstering the assumption that the Fed won’t need to keep hiking interest rates as aggressively. Hope has grown that a recession can be avoided.

The problem with this thesis is it discounts the tough decisions that face the central bank, given the chance that inflation stays elevated for longer than anyone wants.

“If the market really thinks the Fed [is] going to start cutting rates next year, I’d like what it’s smoking,” Hewson said.

Already, there are signs that sentiment is starting to weaken again. US stock futures are down after the S&P 500 snapped its four-week winning streak on Friday. They could continue to drop as yields on 10-year US Treasuries, which move opposite prices, push back up toward 3%, making riskier investments look less attractive. The US dollar is also moving higher, indicating a waning appetite for risk.

Breaking it down: The Fed faces a difficult set of choices. Minutes from its latest meeting, which were released last week, highlight the stakes.

The central bank said that “uncertainty about the medium-term course of inflation remained high” and noted that price rises are well above its 2% target, which indicates it will need to stay tough. At the same time, it said it “would become appropriate at some point to slow the pace of policy rate increases,” since there is a lag time between action and when the effects are reflected across the economy.

Investors have honed in on the latter language. But how chill can the Fed really get as long as its preferred measure of inflation is more than double where it wants it to be?

“We need to get inflation down urgently,” Minneapolis Federal Reserve Bank President Neel Kashkari said at an event last Thursday, pointing to interest rate hikes as the best way to reduce demand and lower prices.

There are three Fed meetings on the calendar between now and the end of the year. And if the central bank really wants to get its target rate to between 3.75% and 4% by then, as some members have indicated, it would need to hike rates by three-quarters of a percentage point once more in September, or opt for a trio of half-point rises. Neither option sounds particularly dovish.

If markets continue to rally, it also could make the Fed more likely to hew hawkish, since it wants financing costs for business to rise, not fall, as stopping inflation remains the top priority.

Goldman Sachs told clients on Monday that “downside risks loom,” noting that the path for inflation and growth, which determines what the Fed does next, will also dictate where the market heads.

On the radar: Attention now turns to Jackson Hole, Wyoming, where Chair Jerome Powell is scheduled to speak at the central bank’s annual symposium later this week. Nicholas Colas of DataTrek Research notes that the S&P 500 is down just 5% since the last Jackson Hole event. Does that really reflect all that’s changed during that time?

Owner of Regal Cinemas may file for bankruptcy

The owner of Regal Cinemas confirmed Monday that it was considering filing for bankruptcy but promised “business as usual” as it tries to shore up its finances.

The latest: British company Cineworld Group said in a statement that a “voluntary Chapter 11 filing in the United States” was one of the options it was reviewing in an attempt to reduce its debt burden, my CNN Business colleague Mark Thompson reports.

Cineworld and Regal theaters would stay open in the meantime, it added.

Investor insight: Shares in Cineworld crashed as much as 80% in London on Friday after the Wall Street Journal reported that the world’s second largest movie theater chain had spoken to lawyers at Kirkland & Ellis to advise on the bankruptcy process in the United States and United Kingdom.

They’ve recovered slightly since Friday’s rout, but are still trading nearly 60% below Thursday’s closing level.

The company struggled to stay afloat during the pandemic, when it was forced to close its movie theaters worldwide. It suffered a $2.7 billion loss in 2020, and $566 million loss in 2021.

Cineworld said earlier last week that, despite a “gradual recovery of demand” since last spring, admissions were below expectations. Revenues at the US box office so far this year are nearly 30% lower than before the pandemic, according to Comscore, a media data company.

Cineworld blamed a limited roster of films for the lack of moviegoers, a situation it expects to continue until the end of November.

When Meta CEO Mark Zuckerberg debuted Horizon Worlds, a virtual reality social app, in France and Spain last week, he shared a photo of himself as a digital avatar, posing in front of the Eiffel Tower and rolling green hills.

The avatar looked cheap and flat — and the internet took note. Meme-makers put in extra shifts, and Zuckerberg was quickly chastened. Twitter called the depiction “eye-gougingly ugly” and “an international laughingstock.”

Zuckerberg said on Friday that there were more updates coming, and posted a photo of a more advanced-looking avatar on Instagram and Facebook, my CNN Business colleague Ramishah Maruf reported.

“I know the photo I posted earlier this week was pretty basic — it was taken very quickly to celebrate a launch,” Zuckerberg wrote, adding that the team is “capable of much more.” He promised that Horizon is “improving very quickly.”

My thought bubble: Facebook and Meta are easy targets for social media users after a series of scandals eroded public trust. But the episode underscores the stakes for Meta as it pivots toward augmented and virtual reality, an effort that cost more than $10 billion last year.

Analysts see big opportunities for businesses in the metaverse. But whether Facebook’s parent company is best positioned to take advantage of them is an open question. The graphics snafu raises doubts.

“There are many, many other players that are trying to do the same thing that Meta’s trying to do,” Angelo Zino of CFRA Research told CNN Business earlier this year. “And I would argue that there are many players out there that are well ahead.”

Up next

Zoom Video (ZM) reports results after the close.

Coming tomorrow: S&P Global publishes its latest batch of PMI data, which tracks the health of the manufacturing and services sectors of top economies.

Markets are fighting the Fed | CNN Business (2024)

FAQs

What happens to the stock market when the Fed cuts rates? ›

Stocks have typically risen in the six- to 12-month period following the Fed's first rate cut, as long as the economy avoids recession, Truist's research showed. Lower interest rates could also help broaden the equity rally, which has been led by a handful of megacap companies like Nvidia (NVDA. O) , opens new tab.

How is the Fed affecting the market? ›

When the Federal Reserve changes interest rates, it has a ripple effect throughout the broader economy, affecting both stock and bond markets in different ways. Lower rates make borrowing money cheaper. This encourages consumer and business spending and investment and can boost stock prices.

Can the Fed trigger a recession? ›

Whenever the Federal Reserve lifts rates to battle high inflation, the risk of a recession increases, and the US economy has typically fallen into an economic downturn under the weight of rising borrowing costs.

What does "don't fight the fed" mean? ›

“Don't Fight the Fed” is a phrase used in financial markets that advises against opposing or underestimating the influence and actions of the Federal Reserve (Fed), the central bank of the US. It acts as a lender of last resort, providing liquidity to financial institutions during economic distress.

Who benefits from rate cuts? ›

As mentioned before, lower rates typically benefit growth stocks by reducing borrowing costs and increasing the present value of future earnings. That's why you'll often see growth stocks, such as techs, rally when rate cuts may be on the table.

Who benefits from high interest rates? ›

With profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates. Central bank monetary policies and the Fed's reserver ratio requirements also impact banking sector performance.

What stocks will go up when interest rates go down? ›

Cyclical stock sectors

The consumer discretionary, technology, real estate, and financial sectors have historically been especially likely to outperform the market when rates fall and earnings rise. Financial stocks look particularly appealing, due to how inexpensive they've recently been.

Why won't raising interest rates work? ›

Raising borrowing costs for consumers theoretically means they have less to spend on other goods and services. Just as importantly, it raises borrowing costs for businesses, reducing demand for investment and lowering profits. This lowers their ability to employ people or give inflation-busting pay rises.

Where to put your cash after the Fed's interest rate increase? ›

Since savers don't know which way rates will move next, advisers often recommend a CD ladder. This means buying a series of CDs with progressively later maturity dates. Laddering ensures that some portion of your savings matures each year and can be spent or moved into other investments as rates change.

Which is worse, inflation or recession? ›

Fullenkamp said a recession is probably the worse of the two. Inflation, which can be driven by high demand, can often be a byproduct of an economy that is still growing, he noted. But “neither is really great,” he said — and it's understandable why inflation might be just as frustrating for consumers as a recession.

Will there be an economic crisis in 2024? ›

Many economists, including Federal Open Market Committee (FOMC) members, anticipate a soft landing for the U.S. economy in 2024 that includes slowing GDP growth but no recession.

Are we in an economic depression? ›

However, our opinions are our own. See how we rate investing products to write unbiased product reviews. A recession is a significant decline in economic activity that can last months or even years. Most experts agree we aren't in a recession yet, but that we could be headed for one in 2024.

Who is behind the Fed? ›

The Federal Reserve System is not "owned" by anyone. The Federal Reserve was created in 1913 by the Federal Reserve Act to serve as the nation's central bank. The Board of Governors in Washington, D.C., is an agency of the federal government and reports to and is directly accountable to the Congress.

What would happen if there was no Fed? ›

Before the Fed existed the United States went broke and into severe depression on a sickeningly frequent basis. JP Morgan once bailed out the Treasury. If there were no Fed, the US would have collapsed long, long ago.

Who does the Fed answer to? ›

The Board of Governors—located in Washington, D.C.—is the governing body of the Federal Reserve System. is an agency of the federal government that reports to and is directly accountable to Congress.

What will happen if the Fed cuts interest rates? ›

Larger rate cuts would provide welcome relief to borrowers, including home and car buyers who have been priced out of the market due to high financing costs. The downside would be felt by savers, given that high-interest rate savings accounts and CDs would likely offer less favorable terms following Fed cuts.

How will the Fed announcement affect the stock market? ›

In general, traders eagerly await announcements that come from the Federal Reserve. On Fed days, trading volume is notably higher; and on the day preceding a Fed day, trading is usually relatively calm.

How many times will the Fed cut rates in 2024? ›

The Federal Reserve is now calling for only one interest rate cut in 2024. But their forecast is likely overly cautious, and we think there will be two or more cuts this year. As was widely expected, the Fed kept the federal-funds rate unchanged at a target range of 5.25%-5.50% at its June meeting.

Do bonds go up when the Fed cuts rates? ›

Rate cuts also generally mean that bond prices will rise in the future, since bond prices and yields move inversely, so investing before the Fed cuts could mean you benefit from price appreciation.

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