QQQ - Federal Reserve May Have To Raise Rates By End Of Year (A Contrarian View)

2024-03-21 14:30:46 ET

Summary

• The market is pricing in Federal Reserve rate cuts, leading to a high P/E ratio in the S&P 500, making for much downside risk if rate cuts do not materialize.
• Inflation is holding above 3%, potentially hindering rate cuts, and providing a high base for a potential re-acceleration of inflationary pressures.
• Rising oil prices and deglobalization contribute to upward inflationary pressures by limiting supply and pushing production costs higher.
• $2 Trillion/year average federal budget deficits are inflationary when combined with the scarcity of goods effect, since it leads to excess money chasing too few goods.
• The Federal Reserve may not necessarily react forcefully to any uptick in inflationary pressures, until after the November elections, after which, depending on how bad inflationary pressures might get, it could even raise rates by the end of the year.

Investment thesis: The market is currently pricing in Federal Reserve interest rate cuts, with expectations recently boosted by its latest signals . The S&P 500 Index ( SP500 ) is trading at a P/E rate of about 28, whereas historically it has been averaging about 16, which is arguably an indication of rate-cut expectations being baked into market valuations....

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