5 Consecutive Winning Weeks for US Markets: What Does the Fed's Role Mean for Investors?

The S&P 500 has crossed the 5,000 barrier, and the Nasdaq is almost ready to surpass its previous high of 16,057. The markets are surging to all-time highs. It also appears that the US economy is gaining steam. In January, the rate of unemployment in the country was below 4% for the 24th consecutive month, staying at 3.7%.

The US stock markets have achieved an impressive feat by notching five consecutive winning weeks, boosted by strong corporate earnings and gains in Big Tech. However, this optimistic trend has faced a potential challenge from the Federal Reserve's efforts to temper investor expectations for numerous interest rate cuts in 2024.

Despite repeated statements indicating no more than three cuts, there remains a significant mismatch between the Fed's intentions and investor forecasts of up to five cuts. This disparity is causing unease among economists and investors alike.

Is a Soft Landing or Recession on the Horizon?

The line between a soft economic landing, where inflation eases without negatively impacting growth, and an outright recession is a fine one. The Federal Reserve's careful navigation of its next moves is crucial in avoiding a potential downturn.

Current indications point to interest rates possibly coming as early as this year but not until spring or summer. Torsten Slok, Apollo Global Management's chief economist, cautions that there's still more than a 50% chance of the Fed cutting faster than expected or even raising rates again.

The latest NABE survey revealed that over one in every five participants believe that the Federal Reserve's current approach to monetary policy is "overly cautious." The results were released ahead of the January policy meeting, where officials opted to keep rates unchanged, and Jerome Powell expressed uncertainty about cutting rates in March. Atlanta Federal Reserve President Raphael Bostic has indicated that he does not foresee interest rate reductions occurring before the summer season.

Will Crypto be Impacted?

After two years of erratic results, Bitcoin has risen beyond $50,000, signaling a robust resurgence. By September 2024, according to leading cryptocurrency analyst EGRAG Crypto, the market value of Bitcoin may reach $2 trillion. Despite all this rise and gains, markets may still be broken by the Fed.

Investors have historically relied on the Federal Reserve's rate choices as a critical tool for asset evaluation. Government securities are often devalued by lower interest rates, which makes assets like cryptocurrency more appealing. The world's financial markets are about to become unstable, according to today's hotter-than-expected statistics, which might put further pressure on the cryptocurrency markets.

After US CPI data was released, the price of bitcoin dropped to around 2%. At the time of writing, the OG-crypto was trading for $48,666.29, down from $49,536 per unit earlier. The statement caused the Dow e-minis, S&P 500 e-minis, and Nasdaq 100 e-minis to all fall sharply, mirroring the movement of Bitcoin in tandem with bigger markets.

Global financial markets will probably see pressure if the Fed delays cutting rates. There might be some knock-on consequences to the cryptocurrency markets in such a scenario if there was a more significant collapse in the world markets. This might manifest as a slowdown in the amount of transactions or a progressive drop in price.

Market Stability Amidst Uncertainty

Despite the apparent market stability, there are underlying signs of unease and uncertainty among investors. Interest rate volatility and swaption volatility remain relatively high compared to the VIX, indicating significant interest rate fluctuations are expected in the near future. This uncertainty can lead to increased instability and potential risks in the world of interest rates.