I’ve already mentioned that the market’s enthusiasm about slowing inflation could be premature.
Firstly, the year-over-year CPI growth in November-December may accelerate due to the fact that it’s being measured against the low base of 2022. The result could come as an unpleasant surprise to many.
Secondly, even if the Federal Reserve does start to lower rates in the first half of 2024, that doesn’t necessarily mean stocks will respond with a surge. Historically, after the first rate cut in a cycle, stocks tend to decline for another 1.5 to 2 years. This pattern was observed in both 2000 and 2007. The most significant market movements started after rate cuts began, with markets bottoming out only when rates were at their lowest.
Formally, after the rate cut in 2019, the market bottom was also only reached almost a year later. However, this case was exceptional not only due to the pandemic but also because the rate hike cycle wasn’t completed – the Fed planned to raise rates four times in 2019 but reversed course abruptly due to the stock market crash around Christmas 2018.
Otherwise, it would have been a typical scenario—the one which, most likely, awaits us this time as well.
Negative economic impacts from high rates will still manifest. Therefore, I wouldn’t rush to buy stocks for the next cycle just yet.