Last night’s speech by Jerome Powell, the chair of the United States Federal Reserve (Feds), had indicated the interest rates would be held steady and there would be at least three rate cuts in 2024.
The market’s response was instantaneous.
The S&P 500 jumped by 1.3% when Powell’s speech began at 2PM New York time. This morning, the Straits Times Index jumped by around 1% when it opened. It was a sea of green across most asset classes and counters in our portfolio. Nominally a reduction of interest rates would favour all asset classes apart from cash, which explains why even gold and bond funds went up.
While there is a sense of exuberance going on around, I would advise some caution and not be carried away in the wave. Markets tend to be forward looking, which means the reactions are based on a future potential set of events, ceteris paribus. We need to acknowledge that market and economic cycles are usually not synchronized with each other, having the scenario where stock indices are going up while workers are getting laid off. The effects of higher cost of leverage due to higher rates would probably be felt around now till next year as most loan covenants, which there was a term period attached, were recently finalized. Finally, the momentum for this upward trend would not last forever; a slow acceleration and eventually a slight pullback would be encountered, though I do not know when.
Regardless of my caution, it is good to stay invested throughout, in times of boom or bust. Stay diversified, stay calm.
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