WallStreetFrontline｜TimAnderson：2600

The latest ADP national employment report revealed that private-sector job growth surged by 184,000 in March, with an annual pay increase of 5.1%, the highest since July 2023. This indicates continued economic strength as well as growing investor worries about future Federal Reserve interest rate cuts. At the same time, oil prices rose to their highest level since October 2023, while gold price also reached record high above $2,300.

Will the upward trend of oil and gold prices continue into the second quarter of 2024? What are the highlights of this week’s U.S. stock market? In this week's Wall Street Frontline, Tim Anderson, New York Stock Exchange Trader and TJM Investments Managing Director, joined us to share his thoughts.

21st Century Business Herald:This week marks the start of Q2. What are the highlights of this week's US stock market?

Tim Anderson: It's been quite a volatile week in the markets. We experienced some well-deserved profit-taking at the week's start, leading to a sharp decline. Interestingly, after a strong market opening on Thursday, we saw a reversal, primarily sparked by hawkish remarks from several high-ranking Federal Reserve officials, coupled with growing geopolitical tensions in the Middle East.

However, today we're witnessing a significant rebound, which has effectively erased most of the earlier sell-off. This situation closely mirrors the market dynamics in the first week of January, following a robust end to 2023. Back then, the initial softness in the markets, driven by concerns over the so-called 'January effect', made some investors quite anxious. This phenomenon typically suggests that if the first week of January sees a downturn, the trend might persist for the rest of the month.

Now, as we enter the first week of the second quarter, it seems we might be heading for a similar pattern of a negative week. However, I remain optimistic that the markets will navigate through these short-term fluctuations. I believe that, as we progress through the second quarter and approach the mid-year point, the path of least resistance for the markets will continue to be upwards.

21st Century Business Herald: What is your outlook for Q2 and what are the important factors to watch for?

Tim Anderson: It will be crucial to observe if the market continues its current rotation. Mega cap tech and AI-driven technology, broadly speaking, have been major drivers of the market's strong performance not just over the last quarter, but indeed over the past year and a half. However, toward the end of the first quarter, we witnessed a broadening of the market, which is a healthy development. The pace of gains in these mega cap tech stocks, which no one really anticipated to sustain realistically, has slowed down a bit.While they still performed well in the first quarter, we began to see a noticeable strengthening in sectors like industrials, materials, and energy. This diversification is beneficial, as it indicates a more expansive rally, with significant investments flowing into other sectors. It's encouraging to see that the market's gains are not solely reliant on the tech sector.

21st Century Business Herald: If we look at the economic data such as the ADP National Employment Report, we will see private sector employment increased by 184,000 jobs in March. And according to the latest report from the Labor Department, the job market continues to be strong. How do you think these economic data would be reflected in the equity market? How would they affect the US economy?

Tim Anderson: The robustness of the labor market can indeed be seen as a double-edged sword for equity markets, though I believe it ultimately tips towards the positive. It's beneficial to have a strong labor force as it equates to more disposable income for consumers, which in turn fuels consumer spending—a pillar that accounts for nearly 70% of the US economy. It's also indicative of business health when companies are able to hire and pay higher wages, even with the rising minimum wage seen in most parts of the country. This suggests that businesses are profitable enough to afford wage increases.

However, the concern that a stronger labor market could be inflationary lingers. The theory goes that more money in the hands of consumers could lead to increased spending, which in turn might drive prices up. Despite this, I maintain that the overall impact is a net positive. Even Federal Reserve Chair Jerome Powell has repeatedly suggested that a strong labor market does not necessarily lead to runaway inflation, nor has it historically been the primary catalyst for inflation that harms the economy.

21st Century Business Herald: Last week, Fed Chair Jerome Powell said that the Fed needs more evidence of easing inflation before lowering the cost of borrowing. Atlanta Fed President Raphael Bostic said he only saw one rate cut this year, sometime in the fourth quarter. How do you think the Fed will do during their May and June’s meetings in terms of the monetary decision?

Tim Anderson: I think it's quite probable that we will see a rate cut from the Federal Reserve in June. Strategically placed in mid-month, such a move could provide a substantial psychological boost to the markets as we close out the second quarter and the first half of the year—a critical time for money managers to assess first-half performance. A June rate cut could also have a lingering positive impact as we enter the latter half of the year.

Looking ahead, the Fed's decision-making may be influenced by the calendar. Given the desire to avoid impacting the election, it's unlikely we'll see a rate cut in September, as it falls too close to the event. If a cut is made in June, it's probable that they'll skip a cut in July, mirroring the pattern from the end of their hiking cycle when they adjusted rates every other meeting.

As we move towards the end of the year, the timing of the meetings becomes convenient. The November meeting falls just two days after the election, allowing the Fed to potentially cut rate on November 7th without election influence, with the outcomes already decided. Then, with the December meeting still on the schedule, it's feasible to anticipate up to three rate cuts within the year.

Despite this, some hawkish Fed members may temper expectations slightly. And while Powell emphasizes the need for more evidence, he has clarified that the Fed is looking for continued data trends similar to what's been observed over the last six to eight months—data suggesting that inflation is moving towards their 2% target, which would give them the confidence to cut rates without the risk of a misguided decision shortly thereafter.

21st Century Business Herald: By the end of 2024, what range do you expect the interest rates to fall between？

Tim Anderson: Currently, with the Federal funds rate between five and a quarter to five and a half percent, three rate cuts would bring us to a range of 4.5% to 4.75%. This rate is still significantly higher than what we experienced years ago. It seems most likely that this is where we'll end up. However, if there are only two cuts, rates would be between 4.75% to 5%, which would still be manageable.

What we need to do is continue monitoring signals from the bond market and all the forthcoming inflation data. We’ll have a complete set of data before the main meeting at the end of April and beginning of May. Additionally, we’ll receive two full sets of data before the June meeting, giving us several opportunities to review these numbers before then. Therefore, we will have ample inflation data for the Federal Reserve to analyze, helping to inform their decision-making process.

21st Century Business Herald: Another market focus is gold and crude oil prices, gold reached record highs this week. Do you think the upward trend of gold price and US crude oil price will continue into Q2 or even later this year?

Tim Anderson: Gold has undoubtedly spent a long time attempting to break through the $2,000 level, and now that it has convincingly surpassed it, many technicians and strategists suggest that this marks a significant breakthrough. After spending so much time challenging a certain resistance level and then breaking through it - now being about 15% above that level - it reinforces the strength of this move. Therefore, it seems plausible that gold might continue its ascent, possibly reaching first stops around $2,600 to $2,800, and it's not inconceivable that it could even make a run towards the $3,000 mark.

As for oil, it's important to clarify that it's not at an all-time high, but it is certainly at a 6 to 8-month peak, the highest since last October. With the approaching summer driving season, the path of least resistance for oil prices seems to be upwards for now. However, I'm not certain that we'll reach all-time highs. Political motivations are likely to play a role in keeping gasoline prices from spiking too sharply during the summer. Therefore, we might see a gradual increase in oil prices, but I'm skeptical about reaching the $100 per barrel mark.

21st Century Business Herald: What time do you think gold price would reach $2,600 or $2,700?

Tim Anderson:So now it's around $2,330 to $2,340. We could reach $2,600 much sooner than many people might have expected—possibly within a month. Personally, I'd prefer to see a slower, more gradual climb rather than a sharp spike, because those sharp spikes usually lead to very sharp corrections. But I do think we're heading towards $2,600; we'll just have to see how long it takes to get there.

Keep an eye on both gold and silver. Silver has significantly trailed the movement that gold has experienced, but it has now broken out above $25 to about $27.50. I'd closely watch the $28 to $30 level for silver, as well as the $2,350 to $2,400 level for gold. But I really do think that $2,600 is the next significant technical level to watch for gold. That would be 30% above the breakout from the $2,000 mark.

21st Century Business Herald: What do you believe to be the key driver that causes gold price surge?

Tim Anderson: I believe that many central banks, including the People's Bank of China, have been aggressive buyers of gold. It is often considered a meaningful hedge against central banking turmoil and other global uncertainties. Interestingly, the movement of gold from $2,000 to $2,300 has been even more impressive, especially considering that gold typically moves inversely to the US dollar.

However, in the last 4 to 6 weeks, even as the US dollar has been strengthening, gold has broken above the $2,000 level and surged to $2,300. This breaks the previous pattern, indicating that the historical inverse relationship between gold and the US dollar hasn't held during this latest surge.

Additionally, concerns about the U.S. deficit, which many say is unsustainable, are fueling the rise in gold prices. Although the deficit hasn't yet posed a problem for the stock market, bond yields are clearly up. However, historically, bonds have often been in the 4.5% to 5% range, and high-quality companies have thrived in such environments. Alongside deficit concerns, gold's increase is also driven by geopolitical tensions globally. This combination of factors is making gold an attractive investment, even in the context of a strengthening US dollar.