Markets are fighting the Fed | CNN Business (2024)

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Stocks have experienced a sharp summer rebound, easing fear among investors and boosting hopes the bear market has settled on an early hibernation. But at any moment, strategists warn, the Federal Reserve could deliver a reality check that jolts complacent traders.

“Markets have [gotten] used to the idea of the Fed riding to the rescue,” Michael Hewson of CMC Markets told me. “I just do not see that happening.”

The S&P 500 climbed almost 12% between the beginning of July and Friday’s close. Wall Street has found relief in a better-than-expected batch of corporate earnings and the slight slowdown in US inflation, bolstering the assumption that the Fed won’t need to keep hiking interest rates as aggressively. Hope has grown that a recession can be avoided.

The problem with this thesis is it discounts the tough decisions that face the central bank, given the chance that inflation stays elevated for longer than anyone wants.

“If the market really thinks the Fed [is] going to start cutting rates next year, I’d like what it’s smoking,” Hewson said.

Already, there are signs that sentiment is starting to weaken again. US stock futures are down after the S&P 500 snapped its four-week winning streak on Friday. They could continue to drop as yields on 10-year US Treasuries, which move opposite prices, push back up toward 3%, making riskier investments look less attractive. The US dollar is also moving higher, indicating a waning appetite for risk.

Breaking it down: The Fed faces a difficult set of choices. Minutes from its latest meeting, which were released last week, highlight the stakes.

The central bank said that “uncertainty about the medium-term course of inflation remained high” and noted that price rises are well above its 2% target, which indicates it will need to stay tough. At the same time, it said it “would become appropriate at some point to slow the pace of policy rate increases,” since there is a lag time between action and when the effects are reflected across the economy.

Investors have honed in on the latter language. But how chill can the Fed really get as long as its preferred measure of inflation is more than double where it wants it to be?

“We need to get inflation down urgently,” Minneapolis Federal Reserve Bank President Neel Kashkari said at an event last Thursday, pointing to interest rate hikes as the best way to reduce demand and lower prices.

There are three Fed meetings on the calendar between now and the end of the year. And if the central bank really wants to get its target rate to between 3.75% and 4% by then, as some members have indicated, it would need to hike rates by three-quarters of a percentage point once more in September, or opt for a trio of half-point rises. Neither option sounds particularly dovish.

If markets continue to rally, it also could make the Fed more likely to hew hawkish, since it wants financing costs for business to rise, not fall, as stopping inflation remains the top priority.

Goldman Sachs told clients on Monday that “downside risks loom,” noting that the path for inflation and growth, which determines what the Fed does next, will also dictate where the market heads.

On the radar: Attention now turns to Jackson Hole, Wyoming, where Chair Jerome Powell is scheduled to speak at the central bank’s annual symposium later this week. Nicholas Colas of DataTrek Research notes that the S&P 500 is down just 5% since the last Jackson Hole event. Does that really reflect all that’s changed during that time?

Owner of Regal Cinemas may file for bankruptcy

The owner of Regal Cinemas confirmed Monday that it was considering filing for bankruptcy but promised “business as usual” as it tries to shore up its finances.

The latest: British company Cineworld Group said in a statement that a “voluntary Chapter 11 filing in the United States” was one of the options it was reviewing in an attempt to reduce its debt burden, my CNN Business colleague Mark Thompson reports.

Cineworld and Regal theaters would stay open in the meantime, it added.

Investor insight: Shares in Cineworld crashed as much as 80% in London on Friday after the Wall Street Journal reported that the world’s second largest movie theater chain had spoken to lawyers at Kirkland & Ellis to advise on the bankruptcy process in the United States and United Kingdom.

They’ve recovered slightly since Friday’s rout, but are still trading nearly 60% below Thursday’s closing level.

The company struggled to stay afloat during the pandemic, when it was forced to close its movie theaters worldwide. It suffered a $2.7 billion loss in 2020, and $566 million loss in 2021.

Cineworld said earlier last week that, despite a “gradual recovery of demand” since last spring, admissions were below expectations. Revenues at the US box office so far this year are nearly 30% lower than before the pandemic, according to Comscore, a media data company.

Cineworld blamed a limited roster of films for the lack of moviegoers, a situation it expects to continue until the end of November.

When Meta CEO Mark Zuckerberg debuted Horizon Worlds, a virtual reality social app, in France and Spain last week, he shared a photo of himself as a digital avatar, posing in front of the Eiffel Tower and rolling green hills.

The avatar looked cheap and flat — and the internet took note. Meme-makers put in extra shifts, and Zuckerberg was quickly chastened. Twitter called the depiction “eye-gougingly ugly” and “an international laughingstock.”

Zuckerberg said on Friday that there were more updates coming, and posted a photo of a more advanced-looking avatar on Instagram and Facebook, my CNN Business colleague Ramishah Maruf reported.

“I know the photo I posted earlier this week was pretty basic — it was taken very quickly to celebrate a launch,” Zuckerberg wrote, adding that the team is “capable of much more.” He promised that Horizon is “improving very quickly.”

My thought bubble: Facebook and Meta are easy targets for social media users after a series of scandals eroded public trust. But the episode underscores the stakes for Meta as it pivots toward augmented and virtual reality, an effort that cost more than $10 billion last year.

Analysts see big opportunities for businesses in the metaverse. But whether Facebook’s parent company is best positioned to take advantage of them is an open question. The graphics snafu raises doubts.

“There are many, many other players that are trying to do the same thing that Meta’s trying to do,” Angelo Zino of CFRA Research told CNN Business earlier this year. “And I would argue that there are many players out there that are well ahead.”

Up next

Zoom Video (ZM) reports results after the close.

Coming tomorrow: S&P Global publishes its latest batch of PMI data, which tracks the health of the manufacturing and services sectors of top economies.

Markets are fighting the Fed | CNN Business (2024)

FAQs

What happens to the stock market when the Fed cuts rates? ›

In other words, the market's anticipation that the Fed would lower rates had a positive effect stock prices, since it assumes that a company's earnings per share and profits will rise as borrowing costs decline. In effect, lower interest rates lead to higher price-to-earnings metrics and vice versa.

How is the Fed affecting the stock market? ›

As a general rule of thumb, when the Federal Reserve cuts interest rates, it causes the stock market to go up; when the Federal Reserve raises interest rates, it causes the stock market to go down. But there is no guarantee as to how the market will react to any given interest rate change.

What happens to money markets when the Fed raises rates? ›

Whenever the Fed raises rates, investors should prepare for potential volatility as the market adjusts to a new environment. Areas of the market with high leverage or low liquidity may react the most.

How many times will the Fed cut rates in 2024? ›

The Fed on Wednesday afternoon held rates steady as expected, but signaled that it now expects to cut rates just once in 2024 rather than the three times it had previously forecast.

What stocks will benefit from rate cuts? ›

Falling interest rates often go hand-in-hand with rising earnings, which historically has particularly benefited cyclical sectors. The consumer discretionary, technology, real estate, and financial sectors have historically been especially likely to outperform the market when rates fall and earnings rise.

Who benefits from negative interest rates? ›

When interest rates are negative, lenders pay borrowers for holding debt. This means that someone gets paid interest for holding a loan, such as a mortgage or personal loan. As such, banks lose out while borrowers benefit.

Is now a good time to buy money market funds? ›

With interest rates higher than they've been in some time, savers and investors are once again able to earn decent rates of return in relatively safe investments such as money market funds.

Has any money market fund ever broken the buck? ›

On Sept. 16, 2008, the Reserve Primary Fund broke the buck when its net asset value (NAV) fell below $1 per share. It was one of the first times in the history of investing that a retail money market fund had failed to maintain a $1 per share NAV. The implications sent shockwaves through the industry.

Who benefits from high interest rates? ›

With profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates. Central bank monetary policies and the Fed's reserver ratio requirements also impact banking sector performance.

What is the date of the next Fed meeting in 2024? ›

This is a modal window.

Where are rates expected to be in 2024? ›

But until the Fed sees evidence of slowing economic growth, interest rates will stay higher for longer. The 30-year fixed mortgage rate is expected to fall to the mid-6% range through the end of 2024, potentially dipping into high-5% territory by the end of 2025.

What is the Fed interest rate today? ›

The central bank kept the federal funds rate — or what banks charge each other for short-term loans — in a range of 5.25% to 5.5%. It has remained at that level, the highest in 23 years, since July of 2023.

What happens to stocks when interest rates drop? ›

When interest rates are rising, both businesses and consumers will cut back on spending. This will cause earnings to fall and stock prices to drop. On the other hand, when interest rates have fallen significantly, consumers and businesses will increase spending, causing stock prices to rise.

What will happen if the Fed cuts interest rates? ›

The Fed typically cuts only when the economy appears to be weakening and needs help. Lower interest rates would reduce borrowing costs for homes, cars and other major purchases and probably fuel higher stock prices, all of which could help accelerate growth.

Are rate cuts good for bank stocks? ›

While higher interest rates may benefit banks by allowing them to charge more for loans, higher borrowing costs put a damper on transactions, McGratty said. A cut in interest rates may stimulate more economic activity, which will benefit banks, he said.

What stocks go up when interest rates rise? ›

Stocks to Watch When Rates Rise
CompanyTickerIndustry
The Travelers CompaniesTRVInsurance
WhirlpoolWHRElectronics/Appliances
Kohl'sKSSRetail (Department Stores)
Costco WholesaleCOSTRetail (Specialty Stores)
10 more rows

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