A Big Global Headwind for Stocks Has Ended

In the past year, the number of central banks raising rates has declined precipitously. This opens the door for strong earnings and growth to propel stocks in 2024.

The End of a Major Headwind for Stocks Soaring inflation in 2022, followed by the Federal Reserve's monetary tightening campaign, is often framed in U.S.-centric terms. Many may see rising prices, rising interest rates, and higher borrowing costs as a uniquely American experience over the past couple of years. But that’s not the case. The reality is that rising inflation and central bank tightening were a global phenomenon, which ultimately led to major global central banks raising borrowing costs by 4,105 basis points over the past year and a half or so. Using data from the Council on Foreign Relations (CFR) Global Monetary Policy Tracker, I find that the world hasn’t seen the level of ‘synchronous monetary tightening’ since early 2006.1 Your Q1 Advantage: Discover Zacks Market Insights! This quarter, release yourself from the chaos of daily market fluctuations and unpredictable news! To take better control of your investment portfolio, I recommend focusing on essential factors in our just-released February 2024 Stock Market Outlook Report 2. This report contains some of our key forecasts to consider such as: Zacks Rank S&P 500 sector picks Current asset allocation guidelines Zacks forecasts for the months ahead Zacks Rank industry tables Buy-side and sell-side consensus at a glance And much more! If you have $500,000 or more to invest and want to take charge of your financial journey, click on the link below to get your free report today! IT’S FREE. Download the Just-Released February 2024 Stock Market Outlook 2 Perhaps the most unique feature of this global monetary tightening event, however, was the pace and magnitude of rate hikes almost across the board. The CFR’s Global Monetary Policy Tracker compiles data from 54 countries around the world, ranking monetary policy as maximally tight (10), neutral (0), or maximally accommodative (-10). From July 2022 to September 2023, the tracker hovered above 8. Country Change in Benchmark Policy Rate United States +5.5% New Zealand +5.5% UK +5.25% Canada +5% Euro Zone +4% Norway +4.5% Australia +4.35% Sweden +4% Switzerland +1.75% Japan -0.1% Source: CFR 3 The downside volatility experienced across global equity markets in 2022 was rooted in these rapidly tightening financial conditions. In my view, the recovery that followed in 2023 was equity markets responding to economic resilience, but there were also expectations that the global tightening cycle was nearing its end. That turned out to be right—by December 2023, the CFR monetary policy tracker had fallen to -0.36, and the number of banks cutting rates exceeded the number of banks raising rates for the first time since the pandemic. In other words, by the end of last year, interest rates around the world started falling again. Long-duration U.S. Treasury bond yields fell late last year, but to date, we have not seen any rate cuts from the Fed. 2024 should deliver a few. The Federal Reserve’s preferred inflation gauge, the headline PCE price index, decreased 0.1% in November and was up 2.6% year-over-year. Importantly, the 6-month annualized change of the PCE price index (1.9%) is right on target for the Fed, which I think gives them no choice but to cut. The benchmark Fed funds rate remains in a range of 5.25% to 5.5%, which is about double the long-term “neutral rate” of 2.5% to 3%. Even if the economy continues to grow, the Fed can cut—as long as inflation does not deliver a negative surprise. In projections released following their December meeting, the Fed indicated rates would end 2024 in a range of 4.5% to 4.75%, which implies three 25 basis point rate cuts in the new year. The market generally expects more than three rate cuts, but forecasts tend to be a moving target. Globally, the European Central Bank (ECB) and the Bank of England (BoE) both left rates on hold at their latest meeting, and the ECB is widely expected to be one of the first key central banks to cut rates in the new year. Markets are pricing in 140 basis points of cuts. The BoE is still telegraphing “higher-for-longer” to markets, but if the Fed and ECB cut rates, the BoE is almost certain to follow. Same for the Bank of Australia. Taken together, it’s premature in my view to say that 2024 will be a year where all major central banks systematically slashed interest rates together, easing monetary across the globe. But I do think it’s fair to say that the global tightening cycle is over, which I think moves the world from ‘tightening’ to ‘neutral,’ with the next stop being ‘accommodative.’ Bottom Line for Investors In just the past year, the number of central banks raising rates has declined precipitously, essentially marking the end of the most widespread tightening cycles in decades. This policy reversal does not ensure support for global asset prices going forward, and I’d stop short of calling it a tailwind for stocks in the new year. But it does mark the dissipation of a major headwind, which I think opens the door for strong earnings and growth to propel stocks in 2024. To help you focus on factors that can prepare your investments for rising interest rates, volatility, and other market outcomes, I am offering all readers our Just-Released February 2024 Stock Market Outlook Report 4. This report looks at several factors that are producing optimism right now and contains some of our key forecasts to consider such as: Zacks Rank S&P 500 sector picks Current asset allocation guidelines Zacks forecasts for the months ahead Zacks Rank industry tables Buy-side and sell-side consensus at a glance And much more! If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! About Zacks Investment Management Zacks Investment Management was born out of one of the country’s largest providers of independent research, Zacks Investment Research. Our independent research capabilities from our parent company truly distinguish us from other wealth management firms - our strategies are derived from research and innovation, including the proprietary Zacks Rank stock selection model, earnings surprise and estimate revision factors. At Zacks Investment Management, we work with clients with $500,000 or more to invest, and we use this independent research, 35+ years of investment management experience, and tools we’ve developed to design customized investment portfolios based on each client’s individual needs. The end result is investment management that is research driven, results oriented and client focused. Talk to a Zacks Wealth Advisor today. © Zacks Investment Management  |  Privacy Policy 1 Reuters. December 14, 2023. 2 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion. 3 Council for Foreign Relations. December 2023. 4 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion. DISCLOSURE Past performance is no guarantee of future results. 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