The year is almost over and it has been a successful one for the markets: The S&P 500 rose by 23%, which is twice the average. The main drivers of growth were the prospect of a Fed rate cut and the development of artificial intelligence. Inflation was declining, the Fed was sticking to its plans, and talk of AI only increased confidence in its importance for the future. At the same time, the macroeconomic situation deteriorated at the end of the year. This is a quick review from Ivan Kompan, Edinburgh Business School analyst.
At the last Fed meeting of the year, a 25-bp rate cut was predicted with a 96% probability. Although the rate was cut, new data added to the uncertainty. The US GDP grew by 3.1% in the third quarter (against the previous 2.8%), and inflation is projected to rise from 2.1% to 2.5% in 2025. Fed Chairman Powell called for caution due to conflicting economic signals.
Not all Fed members supported the rate cut. The Committee reduced the projected number of rate cuts in 2025 from three to two, which is a bearish signal. At the same time, the labor market is showing stability: unemployment claims have decreased to 220 thousand, and the unemployment forecast has been lowered to 4.2% at the end of the year and 4.3% in 2025. Powell noted that the labor market is cooling but remains stable, and the outlook for the economy looks “pretty bright.”
Markets reacted to the Fed’s hawkish stance by falling. The growing belief in an imminent rate cut is weakening, and this takes away one of the factors behind this year’s market success. However, the economy continues to grow, and interest in AI remains strong. If companies report good quarterly results and optimistic forecasts, markets could rise again in 2024. However, in the face of an overheated market and uncertainty, Powell’s advice should be followed: “Be careful!”.
*And finally, we would like to remind you that the information you have just listened to is not an investment advisory. Remember – investments in the stock market are always tied up with financial risks. So be careful and cautious.
