The stock market is a tale of two opposites. Throughout 2024, the Nasdaq (QQQ) and S&P 500 (SPY) closed at record highs, thanks mostly to a few mega-cap stocks like Apple (AAPL) and Nvidia (NVDA). The real economy is a different story.
Inflation continues to rise, due mostly to the Covid-era stimulus packages worth trillions of dollars. The Fed’s tough stance on keeping rates high may prove ineffective. Inflation catalysts include unsustainable fiscal deficit, rising infrastructure spending, and de-globalization.
The world’s decoupling from China’s manufacturing will add to U.S. inflation for the next several years. Intel’s (INTC) re-shoring of chip production back to the U.S. is an example of an inflation factor.
Rate Cuts Assured
The FedWatch tool indicated a high chance that the Fed would cut rates in September. Still, this tool does not guarantee a cut. The consumer price index fell by 0.1% in June M/M. However, Fed Chair Powell said early last week that higher rates for longer could hurt economic growth.
Your Takeaway
The U.S.'s rising deficit spending would benefit from a rate cut, lowering the cost to manage its debt. Markets expect lower rates, which would suggest that stock markets trade to new highs this year.
