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A Paradigm Shift

February 13, 2024

Last week was a choppy one but overall, the market rose due to strong earnings from Meta and Amazon. The Fed meeting dashed short-term hopes for rate cuts but gave the market long-term support for future cuts. On top of it all, there was a very strong jobs report which continues to show a healthy economy.

Investors are dealing with a lot of crosscurrents now, but I believe a fundamental shift in investor sentiment is occurring slowly. The past couple of years investors have been more focused on Federal Reserve interest rate decisions than on the fundamentals of the economy as a whole. There has been a persistent fear that a strong economy will lead to higher inflation and more interest rate hikes. This fear is still felt by many investors, but I believe it’s shifting to a realization that in the current scenario it’s possible to have a strong economy with inflation stabilized and slowly dropping.

I believe I saw the clues of this shift when the Fed announced last Wednesday that there will likely be interest rate cuts this year, but not in the next few months. The stock market sold off hard on this news because investors wanted the sugar high effect of a rate cut to push the market higher. That evening Meta and Amazon released great earnings reports with plenty of excitement around AI and the market rallied sharply on Thursday. It showed that a strong economy is more important than immediate rate cuts. On Friday morning there was a blockbuster jobs report and immediately the stock market sold off for fear that the Fed would postpone rate hikes further. After the initial selling, the stock market soared with, I believe, the realization that the economy is strong which is more important than immediate rate cuts.

I see this as a goldilocks scenario in which a strong economy will advance the market rally. The Fed has made it clear that if the economy starts to falter, they will cut rates, which will likely boost the market. Knowledge that interest rate cuts are in the future is like a carrot in front of the market, leading it higher. I believe this sentiment will be felt by a broader swath of investors over the coming months which will bring more money into the stock market to continue the rally.