Global stocks fell Wednesday as optimism faded that the Federal Reserve and other central banks may start cutting interest rates soon to boost economic growth.
Markets Pull Back from Recent Gains
Major U.S. indexes declined for a second day after rallying strongly to start 2024 on expectations that easing inflation would lead the Fed to cut rates later this year [1]. However, recent comments from Fed officials have tamped down hopes for rate cuts in the near future.
“It was inevitable that the market would pull back after the sharp gains in the first couple weeks of the year,” said David Joy, chief market strategist at Ameriprise Financial. “The assumption that we’re headed for rate cuts may have gotten a little ahead of itself.”
The Dow Jones Industrial Average fell 212 points, or 0.6%, while the S&P 500 dropped 0.2%. The tech-heavy Nasdaq Composite closed down 0.1%.
||Index|Price|Change|
|-|-|-|-|
|Dow|33,921.52|-212.37 (-0.62%)|
|S&P 500|4,008.23|-7.56 (-0.19%)|
|Nasdaq|11,095.11|-8.64 (-0.08%)|
Meanwhile, Treasury yields climbed, reflecting expectations of firmer Fed policy. Higher yields tend to pressure stocks, especially high-growth technology shares.
Fed Officials Caution Against Rate Cut Bets
Stocks retreated after Fed Governor Christopher Waller said Tuesday there is still “a ways to go” before rates cuts can be considered [2].
“The market may have gotten a little ahead of itself in thinking that one print of inflation is going to cause the Fed to change policy,” said Bill Merz, head of capital market research at U.S. Bank Wealth Management.
On Wednesday, Fed officials Mary Daly and Raphael Bostic echoed Waller’s view that more interest rate hikes are likely needed to get inflation firmly under control [3].
However, some strategists say longer-term rate cut expectations still have merit.
“We continue to think the Fed cuts rates later this year,” said Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets. “Recession risks are rising and financial conditions have tightened significantly.”
Stocks Buffeted by Crosscurrents
Markets face conflicting signals on the growth and rates outlook. While inflation is cooling, latest data shows the U.S. consumer remains resilient and the labor market strong – reducing the case for rate cuts [4].
Upcoming earnings results, especially from major banks, could provide more clues on the health of corporate profits and economic activity. Expectations are muted due to higher rates and slowing growth.
“It’s still a volatile environment for stocks with crosscurrents from inflation, consumer spending and Federal Reserve policy,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. “Right now the risks appear more balanced after the early January rally.”
Going forward, clarity from the Fed and extent of an anticipated economic slowdown will be key for markets. Any signs of stronger resilience that keeps rates higher for longer would likely pressure stocks.
“Much depends on whether we see clear evidence of an impending recession,” said David Bahnsen, chief investment officer at wealth manager The Bahnsen Group. An imminent downturn would likely prompt rate cuts, supporting stocks.
So while the exuberance for rate cuts may have faded for now, longer-term expectations for easing remain – lending potential support for equities later in the year.
International Stocks Also Mostly Lower
Elsewhere, European and Asian stocks closed mostly lower Wednesday amid similar concerns over global growth and central bank policies [5].
||Index|Price|Change|
|-|-|-|-|
|STOXX Europe 600|455.41|-0.96 (-0.21%)|
|Germany’s DAX|15,093.11|-27.22 (-0.18%)|
|Britain’s FTSE 100|7,865.67|-61.81 (-0.78%)|
|Japan’s Nikkei 225|26,402.66|-210.31 (-0.79%)|
|China’s Shanghai Composite|3,240.28|+5.26 (+0.16%)|
A weaker-than-expected GDP report from China fueled concerns about faltering global growth. Meanwhile in Europe, energy costs and inflation remain stubbornly high.
However, Japan’s Nikkei Index reached a fresh 34-year peak as the yen stabilized at 7-month lows versus the dollar. A weaker currency supports Japanese export stocks.
Overall though, global shares mirrored the more cautious tone in the U.S. as investors reassess growth and policy outlooks amid recently mixed economic signals.
The Road Ahead
Markets face a raft of potentially market-moving events over the next week. Major U.S. banks kick off the latest earnings season Friday, providing fresh insight into the health of corporate profits and the economy. Key reports on retail sales, industrial production and housing data are also due.
Ongoing Fed speeches will remain in focus, while the World Economic Forum’s annual meeting in Davos starting next week may yield comments impacting investor sentiment.
So while volatility is likely to remain elevated, upcoming catalysts could help provide more clarity on the rates and growth picture – and direction for stocks.
“Right now uncertainty remains high regarding potential recession and the Fed’s policy path,” U.S. Bank’s Merz said. “We’ll be looking to earnings and economic data for the next turns.”
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