Higher for longer might not be as bad as some fear for stocks, strategist says
Stocks were crushed following Wednesday’s message from the Federal Reserve that interest rates will remain higher for longer than investors initially thought.
The S&P 500 fell more than 2% in a two-day span and the yield on the benchmark 10-year Treasury hit its highest level in 15 years. In total for the week, data from Bank of America showed investors dumped equities at their highest pace since December 2022.
But that reaction might be overdone according to Fundstrat’s head of research Tom Lee.
“The market had an overly hawkish reaction to the FOMC meeting,” Lee said in a video for clients after the market close on Thursday.
Lee disagrees with one of the main factors driving the market action. The Federal Reserve’s updated Summary of Economic Projections (SEP) released Wednesday showed a bias toward one more interest rate hike this year and revealed the Fed now sees interest rates remaining higher than initially thought [than who thought? the central bank?] in both 2024 and 2025.
Lee disagrees with one of the main factors driving the market action. The Federal Reserve’s updated Summary of Economic Projections (SEP) released Wednesday showed a bias toward one more interest rate hike this year and revealed the Fed now sees interest rates remaining higher than initially the central bank initially thought in both 2024 and 2025.
Lee doesn’t see this as a major issue, though, and said higher rates for a more sustained period in the Fed’s forecast makes sense given the Fed’s boost to its outlook for Gross Domestic Product (GDP).
Fed Chair Jerome Powell noted during his press conference that economic growth — which the Fed now sees hitting 2.1% this year, up from its 1% increase in June — would be the driver for another rate hike, not inflation.
“We’ve seen inflation be more persistent over the course of the past year, but I wouldn’t say that’s something that’s appeared in the recent data,” Powell said. “It’s more about stronger economic activity, I would say. So if I had to attribute one thing, again, we’re picking medians here and trying to attribute one explanation, but I think broadly stronger economic activity means we have to do more with rates.”
To Lee, the marriage of higher interest rates and higher GDP not only makes sense, but could mean higher higher price to earnings ratios as the economy expands. Higher P/E’s would then likely lead to higher higher stock valuations.
“A hawkish take would be inflation persistence went up and therefore Fed funds needs to stay high,” Lee wrote in a Friday note to clients.
But, as Lee notes, the Fed’s projections don’t foresee an increase in inflation.
