Category: Politics

Inflation has dominated the economic landscape over the past two years, with the Federal Reserve at the center of efforts to bring it under control. While political figures often take the heat—or the praise—for economic conditions, it is the Fed that shapes monetary policy and sets the course for interest rates.

To combat persistently high inflation, the Federal Reserve has raised interest rates 11 times between 2022 and 2023. These hikes increase the “cost” of money, making borrowing more expensive and less accessible. The underlying goal is to reduce the money supply, cool down economic activity, and ultimately bring down inflation.

Currently, U.S. inflation stands at approximately 2.9%. While this figure is still above the Fed’s long-term target of 2%, it marks a significant improvement from the peak of 9% seen around two years ago. Given this progress, speculation is building that the Fed may be preparing to taper its rate hikes.

Rate Cuts in Sight? Fed Signals Possible Shift

At the recent Fed Economic Symposium, Chairman Jerome Powell hinted that changes to monetary policy could be imminent. While the specifics remain unclear, market observers widely interpret Powell’s comments as a signal that rate cuts could be on the table as soon as this month.

For investors, this potential shift presents both risks and opportunities. One stock that may benefit significantly from a rate cut is Rithm Capital (NYSE: RITM), a real estate investment trust (REIT) with a focus on mortgage origination and real estate asset management. If the Fed cuts rates, Rithm could see a boost in its business as borrowing becomes more affordable and market activity picks up. Now might be an opportune time to consider adding this high-yield dividend stock to your portfolio.

How Rate Cuts Could Propel Rithm Capital

Rithm Capital’s business model is heavily influenced by the broader interest rate environment. As rates climbed over the past two years, the cost of borrowing increased, which directly impacted sectors like real estate. Higher rates have made it more challenging for individuals and businesses to secure loans for home purchases, renovations, or expansions, causing some volatility in Rithm’s financial performance.

However, a shift in the Fed’s stance could set the stage for renewed growth. Lower rates would reduce borrowing costs, potentially driving a surge in mortgage refinancing and stimulating property purchases. Rithm Capital stands to benefit significantly from such trends, offering a pathway to stabilize its earnings. Rithm’s CEO, Michael Nierenberg, is optimistic about the potential impact of upcoming rate cuts. During the company’s Q2 earnings call, he stated, “Looking at the macro picture, we are extremely well-positioned for the future… with the expectations of the Fed lowering rates beginning in September, this bodes very well for our company. This will help lower our borrowing costs and hopefully lead to higher earnings.”

The Case for Investing in Rithm Capital Now

Currently, Rithm’s stock is trading at $11.50, close to its 52-week high. Despite the rising share price, its price-to-book (P/B) ratio remains at 0.92—higher than the lows seen two years ago but still reflective of some investor caution. This fluctuation suggests that the market remains divided over the timing and likelihood of rate cuts.

Throughout much of 2024, many economists and analysts on Wall Street anticipated multiple rate cuts. Prominent investors like Bill Ackman expressed similar expectations. While those cuts have yet to materialize, the mere possibility of rate reductions has injected some optimism into the market, driving interest in stocks like Rithm.

However, the company’s P/B ratio has oscillated frequently in recent months, reflecting a mixed sentiment among investors. This uncertainty is likely due to the Fed’s inaction thus far; many market participants appear to be waiting on the sidelines for concrete policy moves.

Conclusion: A Window of Opportunity

Given the current signs of cooling inflation, Chairman Powell’s recent comments, and the positive outlook from Rithm’s management, there is a strong possibility of a rate cut in the near future—perhaps as soon as September. If that happens, Rithm Capital, with its nearly 9% dividend yield, could become an attractive investment for those looking to capitalize on a favorable shift in the interest rate environment.

Key Takeaways:

• The S&P 500 has hit record highs 31 times in 2024.
• Election years generally favor stocks, especially with incumbent presidents running for re-election.
• Analysts are revising year-end targets upwards despite potential volatility.

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As we approach the midpoint of 2024, US stock markets are on an unprecedented tear, with the S&P 500 breaking records 31 times since January. This performance defies elevated interest rates, inflationary pressures, and geopolitical uncertainties, making 2024 the most robust start to an election year on record.

Election Year Trends and Market Performance

Historically, presidential election years have been favorable for stocks. The S&P 500 has averaged a 7% return in these years since 1952, according to LPL Financial. However, the returns soar to 12.2% when the incumbent president runs for re-election. This year’s performance has outstripped these averages, with the S&P 500 up 14.6% year-to-date, the best start for an election year ever recorded by Goldman Sachs.

The Stability Factor

Incumbent presidents seeking re-election typically bring a sense of stability that investors find reassuring. This year is unique because both major party candidates have previously occupied the White House. Ed Clissold, Chief US Strategist at Ned Davis Research, suggests that this dual incumbency reduces uncertainty, potentially advancing the usual year-end election relief rally.

Consistent Gains and Market Sentiment

Remarkably, the S&P 500 has not seen a 2% decline in 333 days, the longest such streak since February 2018. Scott Rubner of Goldman Sachs remains optimistic about the latter half of the year, noting that a strong first half often leads to a robust second half. Mark Hackett, Chief of Investment Research at Nationwide, concurs, emphasizing the stability and strength of the current market rally.

Broad-Based Rally

The recent market gains are not just confined to a few high-flying tech stocks like Nvidia (NVDA), which is up over 155% this year. The equal-weighted S&P 500 rose by 1.12%, and the small-cap Russell 2000 increased by 0.79% last week, demonstrating a broad-based rally.

Revised Year-End Targets

Given the sustained upward trajectory, several analysts have raised their year-end targets for the S&P 500. Scott Chronert of Citigroup now projects the index to reach 5,600 by year-end, up from his previous target of 5,100. Analysts from Goldman Sachs, Barclays, Deutsche Bank, and UBS have also adjusted their expectations upwards.

Potential Volatility Ahead

Despite the optimism, October often brings increased market volatility in election years. Thursday’s CNN debate between President Joe Biden and former President Donald Trump could generate significant headlines and market movements. Jim Reid of Deutsche Bank notes that such events could shift market sentiment rapidly.

Complacency Risk

Ed Clissold warns that prolonged optimism could lead to complacency, making the market vulnerable to negative news. He suggests that a fall pullback could coincide with earnings revisions, Federal Reserve decisions, and election uncertainties, potentially turning a minor dip into a more significant downturn.

Global Election Influences

The US is not alone in facing election-related market impacts. The UK and France also have upcoming elections, adding to global political uncertainty. In the UK, polls suggest a likely victory for the Labour Party on July 4. Meanwhile, French President Emmanuel Macron has called a snap parliamentary election, with the first round on June 30 and the second on July 7, after his party’s poor performance in European elections. Katie Nixon of Northern Trust Wealth Management anticipates that political uncertainty will cause volatility in European equity and debt markets until these elections conclude.

Conclusion

The US stock market’s remarkable performance in 2024 has been driven by factors unique to this election year, particularly the presence of two incumbent candidates. While the rally has been broad and robust, analysts caution against complacency as political events and economic decisions loom. Investors should remain vigilant, recognizing that while the first half of the year has been exceptionally strong, the latter half may bring increased volatility and unexpected challenges. As always, thorough analysis and strategic planning will be crucial in navigating the remaining months of this landmark election year.