New York, NY, InfraCap Market Update - In a surprise move last week, the Swiss National Bank cut its policy rate 25bp which represents the first developed nation to cut rates in 2024. Brazil, Chile, Columbia and Mexico have also reduced rates in 2024. We believe that the Swiss rate will pave the way for a ECB cut and a Bank of England cut in June with the Fed to follow by July.
This wave of central bank rate cuts is likely to spark a powerful summer rally in both stocks and bonds. Many investors do not appreciate that central banks must inject liquidity into the banking system to lower the policy rate, which causes the monetary base to expand significantly. In fact, we estimate that there will be a $2 trillion increase in the Global Monetary Base (See www.infracapfunds.com for data), which represents an 8% expansion. Substantial increases in the Global Monetary Base are associated with strong stock and bond markets, with the most recent example being the 2020/21 rally fueled by rate cuts and injections of liquidity by global central banks.
We reiterate our 5,750 2024 year-end target for the S&P and our 3.25% target for the US 10-year. We expect preferred stocks and yield stocks to outperform during the summer rally and recommend investors consider adding to small cap exposure as that asset class has dramatically underperformed during the Fed tightening cycle during 2023/24.
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