Will Interest Rates Stay Higher for Longer?

By John Lau

May 1, 2024 – One of the narratives that has fueled the rally in risk assets since the October 2023 lows is the expectation for interest rate cuts by the Federal Reserve. The only issue here is that most recent statistics surrounding inflation, employment, and broader business activity continue to indicate a resilient pace of growth inconsistent with the requirement for near-term rate cuts. In today’s press conference following the two-day meeting in Washington, Fed Chair Powell noted the following: “So far this year, the data have not given us that greater confidence in particular that rate cuts are appropriate. Readings on inflation have come in above expectations. It is likely that gaining such greater confidence will take longer than previously expected.” The good news is that the Fed doesn’t seem to plan on hiking rates further to tighten financial conditions, but it is not going to be cutting soon, either.

For the equity market to resume its rally, we will need to see either some digestion until markets can value the S&P 500 on a 2025 EPS (that happens around July), or a drop in inflation metrics. And higher for longer may ultimately be the realistic scenario through the remainder of 2024. If rates do stay higher for longer, we should expect (1) more general market volatility and (2) a starkly different picture of which sectors and factors will outperform over the rest of the year. The single biggest risk to this market is an economic slowdown and that can appear suddenly, and I want to maintain protection against that by uncovering best of breed solutions to support outperformance through the remainder of 2024.

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