Expectations of Interest Rate Moves Drive Mid-term Stock Performance

Interest Rate expectations drive U.S. stocks in an inverse relationship (rates up => stocks down). As Warren Buffett famously said, "Interest rates are to asset prices … like gravity is to the apple."

Expectations often drive financial behavior. Since the monthly CPI came in above expectations last week, some economists are now expecting the Fed to raise before they lower rates in 2024-2025.

The chart below shows the rally in the Russell 1000 (top 1000 US stocks) since Oct 2023 as expectations for rates fell. The blue shading was placed between a 90-day and a 200-day average of interest rate forecasts derived from natural language processing (NLP) on thousands of news and social media sources discussing U.S. interest rates (sentiment analysis).

Note the stock rally was inversely correlated with rates expectations since October. As the narrative shifts and forecasts for rates move higher, we could see more air coming out of stocks until more assuring CPI numbers come in.