The Federal Reserve told the stock market what it wanted to hear last week.
News Wednesday that the central bank still expects to cut interest rates three times this year sent stocks to record highs. Despite a pullback on Friday, the major averages finished the week with gains north of 2% across the board.
In the week ahead, a holiday-shortened trading week greets investors looking to cap a strong first quarter of the year with the Nasdaq (^IXIC) and S&P 500 (^GSPC) pacing towards double-digit-percentage gains.
The economic calendar will bring investors the week’s key highlight on Friday morning with financial markets closed for Good Friday when the February Personal Consumption Expenditures (PCE) price index is released.
This report contains “core” PCE inflation, the Fed’s preferred measure, which is expected to show monthly price increases moderated from the prior month.
The balance of the economic calendar will be highlighted by housing data and consumer confidence measures, while the earnings calendar will be generally quiet with Walgreens Boots Alliance (WBA) and McCormick (MKC) the biggest companies by market cap set to report results.
The Fed’s future
Over the first quarter of the year, the Fed and investors worked to come to an agreement.
When 2024 began, investors expected the Fed to cut rates six times, or by a cumulative 1.5%. The Fed signaled in December that three cuts, or lowering rates by a total of 0.75%, would be more likely.
The two sides had found common ground ahead of Wednesday’s announcement. And the Fed’s confirmation that markets were “right” sent stocks to record highs.
With the Fed revising up its GDP forecasts, revising down its expectations for unemployment, and holding its interest rate forecasts steady, the central bank more or less issued an “all clear” on the economic story for 2024.
“Our main takeaway from the March FOMC meeting is that the Fed has fully embraced the positive supply-side narrative,” wrote Bank of America US economist Michael Gapen on Thursday.
“Significant upward revisions to growth did not lead to similar declines in unemployment or substantially firmer inflation. Despite projecting much stronger growth, the Fed sees the disinflation trend as remaining in place.”
And encouragingly for investors, Fed Chair Jerome Powell again reiterated that rates are likely at the peak for this current tightening cycle while outlining what Gapen called the Fed’s “asymmetric reaction function.” Meaning, basically, the Fed is happy to cut rates when times are good (i.e., growth is strong and unemployment is low), and would be even happier to cut rates should growth stall or unemployment rise.
Housing, consumers, inflation
The week’s biggest economic data point will come with markets closed on Friday.
Economists expect “core” PCE inflation rose 0.3% over the prior month in February and 2.8% over the prior year. The Fed, you’ll recall, targets 2% inflation.
During his press conference on Wednesday, Powell noted Wednesday that the Fed’s estimates have this number coming in below consensus. Following Powell’s comment, Neil Dutta at Renaissance Macro reminded folks on X that inputs from the Consumer Price Index (CPI) and Producer Price Index (PPI) reports out earlier in the month “get you nearly all the way there” on estimating PCE inflation. Both indexes, we’d note, surprised to the upside this month.
“Our mapping of the CPI and PPI data point to a smaller 0.3% rise in the core PCE deflator last month,” wrote Nancy Vanden Houten, lead US economist at Oxford Economics, in a note on Friday. “That isn’t low enough to give Fed officials more confidence that inflation is on track to hit the 2% target, but it does at least underline that the strength in January was mostly a one-off.”
Elsewhere on the economic calendar, The Conference Board will release consumer confidence data for the month of March on Tuesday. This reading comes after the measure slid last month for the first time since November 2023. In January, the index reached a two-year high.
The IPO window cracks open
Amid last week’s hoopla around the Federal Reserve, investors also saw one of the most hyped IPOs in some time hit the market as Reddit (RDDT) began trading on the New York Stock Exchange Thursday.
Shares of the social media platform closed at $45.94 on Friday, giving the company a market cap of $7.3 billion. On Wednesday night, the IPO priced at $34 per share, netting $748 million in proceeds. Back in 2021, Reddit raised $410 million at a valuation north of $10 billion.
The natural follow-up question is whether Reddit’s debut opens the so-called IPO window for a host of other companies looking to come public.
Yahoo Finance’s Josh Schafer talked to famed finance professor Jay Ritter, who argued this would not lead to a boom in companies going public. Noting that Reddit and others — like Instacart’s parent company Maplebear (CART) — had to take “down rounds,” or receive valuations lower than their prior fundraising level, during their IPOs, many companies will remain reluctant to test the public market.
Veteran tech reporter Dan Primack at Axios argued Friday that this week’s fundraises — which saw more than $5 billion raised globally — mean “we’re done with ‘waiting until market conditions improve’ or ‘uncertainty.’ If a company has the numbers or story to go public, the only impediment is inertia.”
And I think both arguments are right.
Companies go public for many reasons. Some need to raise capital. Others need liquidity for early investors and employees. Others may be spun out from some kind of private ownership structure.
For venture-backed companies, the class from which Reddit emerged, avoiding a down round is certainly the goal. Moreover, many companies raised oodles of cash during the pandemic, making the need for more money a problem for tomorrow. And, whether venture-backed or not, no company wants their value to go down over time.
But investors and employees of Reddit were (and are!) sitting on windfalls that only the liquidity of the public market can make real. Even if the valuation falls short of yesterday’s high-water mark.
And on Primack’s point that, essentially, excuses from management teams about why their IPO must be delayed won’t hold water in today’s market, Reddit’s debut is proof positive.
The company’s valuation is down about 25% from its fundraising two and a half years ago. But the issue was well-received — shares priced at the high end of the range that was marketed to investors.
A criticism of the IPO process is that stocks are priced for the one-day pop Reddit stock experienced, not to find a valuation that garners the most capital for a company. In essence, these events are for bankers, not investors or employees. But of course they are.
And over the long run, the value of Reddit or any other company will be set by the market and subject to forces that frustrate or confound executives, insiders, employees, and others. But that’s the modern financial systemwe have. And after two choppy years, the opportunity for companies to join in on the fun is wide open.
