Buckle up for a bumpy ride in the stock market, BMO Wealth Management’s CIO says. And he’s not the only one sounding the alarm



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With inflation steadily fading from its four-decade high above 9% in June 2022, investors have been anticipating market-juicing interest rate cuts for a while now. The stock market has surged more than 10% this year largely on the prospect of lower borrowing costs—along with a little boost from the hype surrounding AI. But Yung-Yu Ma, BMO Wealth Management’s chief investment officer, warned Wednesday that investors should expect some turbulence ahead—and he wasn’t the only one sounding the alarm.

“The narrative of falling inflation and imminent Fed rate cuts that drove the stock market’s first quarter gains is wobbling in the second quarter,” Ma wrote in emailed comments to Fortune

The veteran CIO said investors are worried about “delayed Federal Reserve rate cuts” that could push long-term bond yields higher, pulling more cash away from equity markets. As Gargi Chaudhuri, BlackRock’s chief investment and portfolio strategist, Americas, wrote in his 2024 outlook, “a cautious Fed, stronger growth, normalizing inflation, and a strong labor market may reward investors for owning bonds.”

Ma said oil’s rise is one of the factors that will continue to exacerbate U.S. inflation, arguing that it could push back the Fed’s interest rate cuts. WTI crude oil prices—a benchmark for the oil market—have surged roughly 20% from $71 to $85 per barrel this year. OPEC+ crude production cuts, geopolitical tensions in the Middle East that have forced cargo ships to reroute, and Ukrainian attacks on Russian oil refineries have all helped drive the increase.

The recent rise in oil prices comes on top of two hotter-than-expected inflation reports in January and February that led a number of investors—and Fed officials—to shift their interest rate cut forecasts as well. At the end of 2023, many investment banks were forecasting 100 basis points of interest rate cuts this year, with some even expecting the first cut in March. But now, the consensus view implies just three 25 basis point cuts. And Atlanta Fed President Raphael Bostic, a voting member of the Federal Open Market Committee that sets interest rates, said Tuesday that he’s anticipating just one rate cut this year in the fourth quarter. However, at a Stanford University event on Wednesday, Fed chair Jerome Powell reiterated his outlook on rate cuts, saying he expects several this year, although he emphasized that “the job of sustainably restoring 2 percent inflation is not yet done.”

A hawkish Fed could be bad for markets, but instead of an outright correction, BMO Wealth Management’s Ma said he’s forecasting a market “consolidation.” There will be “a bifurcated market” this earnings season, he argued, “where many companies are thriving, but an increasing minority are struggling.”

“In part, that mirrors the overall economy where lower socioeconomic groups face greater strains, but the bifurcation is also the result of higher interest rates and other shifts taking place in the economy,” he added.

To his point, we’ve already seen evidence of a haves and have-nots market, with the chip-making giant Nvidia turning in stellar earnings that boosted the market in February, but companies like Tesla and Intel struggling. Nvidia, which is seen as the major beneficiary of the AI boom, grew its revenues by 126% to $61 billion, and increased its net income nearly sixfold to $29.8 billion in its fiscal year 2024. But Tesla had what noted tech bull Dan Ives called “an unmitigated disaster” of a quarter in a Tuesday note. The EV giant sold 387,000 vehicles in the first quarter, 8.5% less than during the same period a year ago as demand for pricey EVs continues to wane.

Ma went on to argue that despite corporations’ mixed earnings results, economic growth still looks “healthy,” which means the stock market should eventually “regain its footing.”

“The stock market doesn’t need Fed rate cuts or even falling inflation, but it’s also not in a robust position to quickly digest risks that could arise from accelerating inflation, increasing geopolitical shocks to oil prices, or rising long-term interest rates,” he explained.

For investors fearing the Fed might become increasingly hawkish, Ma said it will be important to look for “hints at greater inflation in the pipeline,” and Friday’s jobs report could be one of those hints. Central bank officials have been hoping to cool the labor market, and wage increases, in order to tame inflation. As a result, job creation that is “in-line or even slightly below estimates would provide some comfort” for the Fed this week, Ma said, and that could enable them to continue with their interest rate cut plans.

 “A single month of data isn’t that important in the grand scheme of things, but current market psychology is starting to tilt away from the notion that the downward trajectory of inflation is intact, so data that reined the narrative back in place would support the markets,” he added.

However, investors got a warning sign ahead of Friday’s jobs report when Automatic Data Processing (ADP) released its labor market data on Wednesday. U.S. employers hired 184,000 workers in March, and annual pay surged 5.1% from a year ago, according to ADP. Nela Richardson, ADP’s chief economist, said in a statement that the data shows that even though inflation has cooled markedly, “pay is heating up in both goods and services.” 

Jim Baird, Plante Moran Financial Advisors’ CIO, described the “bottom line” of what all of the latest economic data means for investors in written comments to Fortune.

“Taken as a whole, the combination of consumption, inflation, and labor data doesn’t yet look weak enough to prompt Fed policymakers to shift to an easier policy stance in the near term,” he wrote. 

Finally, BMO’s Ma warned investors to remember that the stock markets’ incredible rise over the past five months have been an “exception, not the norm.”

“It’s certainly possible that the goldilocks narrative of high growth and falling inflation could return within a couple of months, but it’s also possible to have choppier markets that take time to digest its recent gains and allow fundamentals to catch up with valuations,” he said.

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