Fed Pause Weighs Down Stocks as Higher Rates Take Toll

Despite initially fueling a “gangbusters” rally in the stock market, investors are now facing the reality that the Federal Reserve is unlikely to cut interest rates anytime soon. This decision has caused stocks to lose momentum and dampen investor spirits, as higher interest rates lead to high borrowing costs for both consumers and corporations, squeezing profits and potentially weighing down the market. However, history suggests that longer periods of higher interest rates do not necessarily result in significant losses for portfolios, although there may not be much more upside near term for stocks. This Fed pause period, which has lasted approximately 35 years and occurred six times when rates were on hold, has resulted in the S&P 500 gaining around 13% on average. During the current pause period, which began when the Fed last hiked rates in July 2023, the S&P 500 has risen by 14%. Some economists believe that the Fed will still ease policy by cutting rates at least once or twice this year, though traders anticipate that the Fed will commence rate cuts in the autumn, as indicated by the CME FedWatch Tool. The US economy has remained relatively stable despite the Fed beginning an aggressive battle against excessive inflation, leading to monthly interest rate increases until December 2023. Although the labor market remains strong and consumer spending continues at a steady pace, stock prices have reached record highs repeatedly. Recent economic data, including persistent inflation, has led to concerns that the Federal Reserve may increase interest rates once again. However, Chair Jerome Powell recently calmed these fears by stating that the Fed requires additional evidence that inflation has decreased significantly before considering easing policies. Additionally, the US federal government is partnering with Wall Street to defend the financial system from cyberattacks via a new public-private partnership known as Project Fortress. This initiative aims to safeguard the economy from potential catastrophic assaults and deter potential hackers by demonstrating that any attempts to harm the US financial system will be met with severe repercussions. Two wealthy businessmen, Mukesh Ambani and Gautam Adani, both prominent champions of Indian Prime Minister Narendra Modi, have become involved in India’s increasingly contentious election campaign. Critics have accused them of being too closely connected to Modi, and at an election rally, Modi appeared to suggest that his primary political opponent had accepted payments from Ambani and Adani. The upcoming Indian general election, which is expected to result in Modi securing a third consecutive term, has seen both men frequently mentioned due to their perceived proximity to the incumbent leader.