2024: The Year of the Double-Brood
It was bound to happen eventually. It appears that the shine is off the markets as investors parsed a bevy of economic data and Fed governor talking points to conclude that interest rate cuts may be delayed further. All three major indices fell between 1-2% this week as it is becoming increasingly clear that the economy is perhaps performing too well. We’ll get to the details but know that sometimes good news is perceived as “bad” and bad news is viewed as “good” which makes understanding investor behavior confounding. The tl;dr is inflation isn’t slowing down fast enough, job growth exploded higher in March, tensions in the Middle East are rising, and consumers are still spending.
Many analysts and economists have bet on an interest rate cut at the June FOMC meeting. However, we’ve gone from six rate cuts at the start of the year, to three rate cuts as economic data stayed persistently strong in the first quarter, to maybe one or two rate cuts later this year. As each realization occurs, the markets adjust expectations accordingly as demonstrated by the increase in volatility and downward price pressure we saw this week. We experienced something similar last summer into early fall as markets digested the economic data and recognized that a recession was becoming less likely, which meant rate cuts wouldn’t happen as expected. This period lasted roughly three months before investors once again embraced good news and the markets were off to the races into the end of last year and the first quarter of this year. I’m not suggesting history will repeat itself, but we may be in for a breather as investors adjust expectations further. After all, we’ve been on a five-month tear with nary a pullback.
As for interest rates, I’ve never seen so many Fed Board Governors walk back the expected rate cuts as this week. No less than four or five of the governors clearly stated that a rate cut would be premature with several suggesting we wouldn’t see one at all this year. Federal Reserve Governor Michelle Bowman went so far as to say that if inflation persists, we may be due for a rate hike. I haven’t heard anyone say that in some time, so it came as a surprise. My hunch is the Fed will want to do something this year just to get the first-rate cut done. Remember that high interest rates don’t just affect consumer borrowing, i.e. mortgage rates and car loans, but government borrowing too. Interest on the national debt has gone from $221B in 2013 to an estimated $870B in 2024. The interest expense on the U.S. national debt is now larger than the $822B we spend on the defense budget and is due to grow as treasuries mature and are replaced at current interest rates. The Fed will increasingly be under pressure to lower interest rates, with the wildcard being whether it starts cutting before or after the presidential election. Time will tell.
Another cause for the change in mood is that energy prices are creeping higher again. Crude oil, which had been at $70 per barrel at the beginning of the year, is now approaching $90 per barrel. This will eventually trickle its way into higher gasoline prices. We’ve held that $70 oil wouldn’t continue as persistent issues in Ukraine and increasing tensions in the Middle East would drive prices higher. In fact, the latest CPI data suggested that energy is one of the components driving inflation up again. While we don’t expect the price of oil to go back to $120 per barrel (June 2022), we could see it move above $100 and this will undoubtedly throw a wrench in the Fed’s best-laid plans.
In closing, I come with good news. The total eclipse isn’t the only special event happening this year. I learned this week that 2024 will be the year of the cicada and not just any brood but a double-brood event resulting in billions of little creatures emerging. This is the kind of thing that happens rarely and was last seen in 1803 when Thomas Jefferson was president. It turns out that the 13-year cycle and the 17-year cycle converge every 221 years with 2024 being just one of those special years. So, you’re probably wondering how this is good news? Well, the good news is that Ohio, Indiana, and most of Kentucky will be spared. The cicadas will be found primarily in Illinois, Missouri, and Arkansas. And fortunately for us, the next time this will happen will be in 2245, just in time for your grandchildren nine generations from now to experience the wonder of it all. Now you know.
Bruce J. Mason, MBA