The S&P 500 on Friday notched its best weekly advance in over a month, primarily on the back of surprisingly soft inflation data. The headline consumer price index for May came in flat in what was its first unchanged reading since July 2022. The consumer inflation data ended up overshadowing the other major event of the week – the Federal Reserve’s latest monetary policy decision and the dot plot. The central bank kept interest rates steady at a 23-year-high, but also signaled an expectation of only one 25 basis point cut in 2024 from a prior forecast for three such cuts. For the week, the S&P added 1.6%, while the Nasdaq climbed 3.2%. Conversely, the Dow fell 0.5%.

That single planned reduction in interest rate is a lot less than the three the Fed forecasted in March. Instead, the central bank now sees four cuts next year, more than the three they previously outlined for 2025. Still, Wall Street traders appeared giddy rather than disappointed. Stocks hit fresh, all time highs on Wednesday as investors stuck with a bet that rates will drop at least twice in 2024.

On the flip side, an economic soft landing for the US got a little harder on Friday, at least as far as consumer perceptions are concerned. The University of Michigan’s consumer sentiment index tumbled to 65.6 in June, defying economists’ estimates of a rise.

Future Wealth’s View

It is clear to everyone that the economy is slowing down – unemployment is inching up, consumer spending is softening and consumer confidence is waning. Which begs the question – why is the market hitting new highs? The answer is – the Fed may finally have the data they need to cut interest rates. While they cautioned that there could be only one interest rate cut this year, what they have done is to increase the number of rate cuts into 2025. A single rate cut – whether it happens in July or September (unlikely to happen in November given the Presidential Election) should be enough to reverse the course of the economy although it may take a few months for the interest rate cut to work its way through the system to begin to reflect in material improvements.

Despite the Fed blunder in 2021, it appears that the Fed may have pulled off one of the most unexpected actions against inflation, without tipping the country into a recession. This will be the stuff of new economic textbooks in years to come and has all but squelched uproars from economists who live and die by yield curve inversion and the Phillips curve.

The lesson for investors is that nothing is set in stone – be it investment strategies or economic theories. Every new decade brings a new technology or a new way of thinking. The key for investors is to be nimble and adapt their investment strategies with the times. If there ever was a reason to bury the cookie cutter approaches adopted by target retirement funds or the 60/40 stock/bond portfolio managers, look no further than what just occurred with the Fed’s fight against inflation.

But, as the saying goes “The more things change, the more they stay the same”. Making money never grows old.