Question:  

Do you think the Fed will cut interest rates in March?

Answer: 

The Fed is unlikely to cut rates in March. The Fed and Chair Powell ended their January meeting leaving interest rates unchanged. In his press conference, Powell suggested a cut in March was “not the most likely case. 

As you may be aware, this column is written a week and a half before publication so it can be reviewed and approved. I mention this because as I write this column, it is February 3rd, the day after Groundhog Day and I’ll be referencing the movie “Groundhog Day. This year on Groundhog Day Punxsutawney Phil did not see his shadow. The tale goes that if he doesn’t see his shadow, we can celebrate the early arrival of Spring. 

The movie “Groundhog Day” is based on events and situations that recur over and over again. We’re facing déjà vu or something similar to our own version of “Groundhog Day” from the Federal Reserve, the economy, the stock market, and the upcoming presidential election with early signs of a Trump-Biden rematch. January’s déjà vu leading into February highlights economic resilience, moderating inflation, expectations of Fed rates cuts (but not yet), and a mega-cap Tech-led equity rally.  

The Fed is repeating its mantra of being in a “data dependent mode” as they evaluate the strength of the economy between now and their next meeting March 19-20. Progress has been made on the inflation frontier, but we’re not yet back to the 2% target rate. The last thing Powell wants to do is reduce rates and cause more inflation with an “Easy Money” scenario. Consensus is that they’ll wait until June to cut rates. Déjà vu all over again with rates remaining the same, for the time being.

Another déjà vu Groundhog Day analogy can be made for the MAGMAN group of stocks (Microsoft, Apple, Google, Meta, Amazon and Nvidia). These names continue to account for a significant percentage of market performance just as they did last year. Expectations are for tech-related sectors to continue to outperform. The obvious question is can they continue to outperform with the answer being yes. Reasons include strong earnings growth and diversification of revenue streams for the MAGMAN names who’ve found ways to monetize and increase margins. Tech will likely continue to lead but expect broader market participation from other sectors this year.

The final “Groundhog Day” reference suggests a Trump-Biden rematch for the November Presidential elections. It’s still early in the race and Trump has legal troubles to deal with, yet his sizable lead over Nikki Halley indicates he could be the Republican candidate in November. Currently, Trump leads Biden in six of the seven battleground states with nine months to go. This is the first election with the same two candidates back-to-back since 1956.

As the Fed tries to steer the economy to a soft, non-recessionary landing, these next few months are crucial. We do know that the economy is historically a strong predictor of elections. If they’re successful, it tends to favor the incumbent, Biden.

Lower interest rates would indicate stabilization in the economy and could increase the breadth of stock market gains beyond the MAGMAN group. Data indicates that market results are typically more dependent on economic and inflation trends rather than election results. What truly matters and influences voters are broad economic indicators like income, employment, and real growth. Interest rates are one component of the overall plan. Stay focused and plan accordingly.