Markets‘ ‘Crazy’ Rate-Cut Expectations Could Mean Trouble: State Street
There's too much exuberance in some sectors, and "we have a lot more uncertainty coming," says strategist George Milling-Stanley.
The financial markets’ expectations that the Federal Reserve will cut interest rates this year — despite signals to the contrary — could spell trouble for stocks, a State Street Global Advisors strategist cautioned this week.
“I’m a little concerned that the markets seem to be losing their faith in [Fed Chairman] Jerome Powell and what he says,” George Milling-Stanley, chief gold strategist at the firm, said in an interview Tuesday with Yahoo Finance.
“Powell, I think, has made it pretty clear that he sees no possibility of a rate cut in 2023, and yet I understand that the markets right now are actually betting on a rate cut as soon as June of this year,” he said.
This market expectation seems “kind of crazy,” Milling-Stanley added.
“I think that’s leading to some exuberance in some sectors of the stock market, which I frankly don’t think are warranted. And I think that we have a lot more uncertainty coming. And if the markets are starting to lose faith in the people who are controlling interest rates, then I think that things are just going to get worse from here,” the strategist explained.
Investors will need more safe havens, including gold, in that case, Milling-Stanley said.
“I’m not saying that everybody should sell all of their stocks and put all their money into gold … but I do think that a small allocation in a properly balanced portfolio can make sense,” the strategist added.
Gold opened the 21st century at $255 an ounce and recently traded at $1,965, he noted. “That’s actually somewhat better than the S&P 500 did over that same period,” and gold over time is a bit less volatile than the S&P 500, Milling-Stanley said.
“If gold can reduce my volatility and has the potential to enhance my returns, then I’m going to want a small allocation to that in my portfolio as a strategic asset,” he said.
If the economy slides into a recession, there could be a sudden drop in stocks, and gold prices may initially fall as investors who bought stocks on margin sell some gold to meet margin calls on their depressed equities, Milling-Stanley explained.
Typically, however, gold benefits on a big stock market downturn and recovers in weeks or months, even when stocks stay depressed for months or years, he told Yahoo Finance.
(Image: jozefmicic/Adobe Stock)