Five charts that matter for investors

Too ambitious?

The US Federal Reserve (Fed) has suggested that interest rates are bound to be cut later this year, with the median projection from the rate-setting Federal Open Market Committee members pointing to fed funds rates of 4.625% and 3.875% by the end of 2024 and 2025, respectively. 

The market appears to be on board with these projections, as fed funds futures reflect a similar path (see chart). However, it seems ambitious to expect such a gentle and smooth path lower in interest rates. 

Can the Fed cut rates by a quarter of a point every other meeting between now and the end of 2025? Possible, but not probable in our view. It assumes a benign macroeconomic environment and that the US economy neither overheats nor cools down too fast. This would be a perfect – and therefore unlikely –  landing.

Markets expect US interest rates to glide lower

Fed funds futures show regular US rate cuts until the end of 2025

Pump it up

The US driving season is upon us and it looks like it will be an expensive one. Indeed, the average gasoline price has reached more than $3.50 a gallon. While this is significantly lower than the peak of $5 per gallon US motorists had to paid when the conflict in Ukraine started in 2022, it’s some 15% more than it was at the beginning of the year.

Higher crude oil prices is partly to blame for the recent surge, but so is the traditional maintenance season for refineries. With the latter coming to an end, there is hope that gasoline prices might even decrease in coming months. Energy costs are a very visible inflation marker and seeing pump prices escalate ahead of the presidential election could be a strong headwind for the Biden administration. 

Average US gasoline prices have soared this year

Average US gasoline prices are back above $3.50 a gallon, and up by close to 15% this year even if they are still well below the 2022 peak of $5 a unit

Is the first cut the deepest?

Some commentators have attributed at least part of the recent rally in equity markets to expectations that interest rates would come down. The argument goes that less restrictive financial conditions should be supportive for risk assets. However, and as often, this may be too simplistic. 

History shows that previous cutting cycles have translated into mixed performance for equities (see chart). In itself, a period of lower rates is beneficial but may not be sufficient to offset a deteriorating economy, at least in the short-to-medium term. In this case, lower rates rarely save equity markets.

If markets head higher in anticipation of lower rates, they also probably foresee a benign macroeconomic landscape. Ultimately, the latter will decide whether interest rates are good or bad for equity markets.

Rate cutting cycles and equity markets

Performance of S&P 500 from the start of a fed funds rate-cutting cycle by the US Federal Reserve since 1973

It’s too quiet

As of March, the S&P 500’s largest drawdown this year was a mere -1.7% (see chart). Since 1970, the US main equity index’s smallest peak-to-trough decline in a calendar year was -2.7% in 1996. In fact, it’s typical for the index to pullback by 5% to 10% over any given year, and much more sometimes.

With many potential market-moving catalysts ahead in 2024, including a US presidential election and the start of rate cuts by the US Federal Reserve (Fed), it would be surprising – and somewhat unusual – not to see more volatility.

Investors don’t need to panic, but they should be prepared for what may lie ahead.

It’s strangely quiet on US equity front

S&P 500 drawdowns over calendar years since 1970 and the index’s annual returns    

India on the podium?

India’s gross domestic product (GDP), as measured in US dollar terms and at current prices, overtook the UK’s in 2022, making the $1.4 trillion-strong economy the fifth largest in the world. If this wasn’t enough to put the country on investors’ radar, maybe the fact that it could become the third largest global economy by the end of the decade might.

Indeed, assuming stable exchange rates and German* GDP growth continuing at 1% per annum, versus 6% for India, the latter could dethrone the former in a few years (see chart). Of course, these assumptions could be proven wrong. That said, even if the timing is subject to change, the reality of India’s economic expansion appears inevitable.

*Note: Germany and Japan have recently traded back and forth for the title of the world’s third largest economy. 

Indian economy climbs the international rankings

Indian economic growth has outperformed the UK and Germany since 1990. Having surpassed the size of the UK economy in 2022, Germany is next in its sights

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