The Fed released its dot plot yesterday indicating 3 rate cuts next year vs. our expectations of only 2 rate cuts. In addition, the Fed Chair’s press conference was unusually dovish. For the first time since the beginning of the Pandemic, the Fed has responded to real-time data instead of sticking to its rigid Phillips Curve and Expectations theories of inflation. Expectations of global 2024 rate cuts surged with the US now implying 144bp of cuts and the Euro Zone increasing to 150bp.
We are raising our target on the S&P to 5,500 from 5,150 based on a 21.5x multiple on S&P consensus earnings of 270. We believe that there is more upside risk to our target than downside risk. Our target assumes a 10-year rate of 3.5%, which is consistent with an S&P multiple of 21.5x based on our discounted cash flow model. We had been previously bullish on interest rates based on expected global interest rate cuts led by the ECB with the Fed lagging badly due to its fundamentally flawed policy framework. With the dovish tilt in Fed policy, global rate cut expectations have surged with every country in the OECD expected to cut rates except Japan with the average rate cut surging to 150bp from 100bp. We believe that these rate cuts will cause a surge in global liquidity will power both bonds and stocks higher in 2024.
Following global monetary policy is critical to forecasting the economy and stock market as monetary policy drives long-term interest rate moves which affects investment spending and the business cycle. A simple rule of investing is to be bullish when central banks are injecting liquidity into the system and be cautious when central banks are restricting liquidity. The global monetary base has declined by $1.1 Trillion over the past 18 months (Global Monetary Base available at www.infracapfunds.com, and both stocks and bonds have been under extreme pressure. Next year, the global monetary base is likely to surge due to central bank interest rate cuts, which will drive stock and bond markets higher.