Expectations for interest-rate cuts are waning. Some investors say stock gains might be hard-won as a result.
3 min
Wall Street entered 2024 betting the year would go perfectly, but an up-and-down start for stocks and bonds suggests the going won’t be easy.
Stocks have climbed to records, driven by cooling inflation that has spurred investors to anticipate as many as six interest-rate cuts. Falling rates often boost share prices by reducing the relative appeal of bonds and making it cheaper for companies and consumers to borrow, lifting corporate profits.
But despite Friday’s record close in the S&P 500, the rally in major indexes has stalled in recent weeks—the benchmark index is up less than 2% from where it was a month ago—while the labour market and economy show few signs of slowing. Bond yields have ticked up in the new year after falling sharply at the end of 2023.
This dynamic is prompting some analysts and portfolio managers to warn that further stock gains might be halting because the rate cuts that are widely expected to power the market higher might not arrive as quickly as bullish investors had wagered.
“Clearly, the consensus is that inflation is under control and we’re heading for a soft landing,” said Doug Fincher, a portfolio manager at New York City-based hedge fund Ionic Capital Management. “It’s certainly possible—but a lot of that is priced in.”
The S&P 500 is up 1.5% this year, but analysts see more signs of caution under the hood.
Investors have retreated this year from shares of banks, smaller companies and real-estate firms that posted big gains during the fourth-quarter rally, which was kicked off by investor belief that the Federal Reserve had pivoted in November to a rate-cutting stance. Bond yields, which rise when prices fall, have climbed as traders have pared back bets that Fed officials will start cutting rates in March.
There is a greater than 50% chance the central bank keeps rates where they are at its March meeting, according to the CME FedWatch tool. At the start of the year, traders expected rates to end December around 3.85%. Now they expect closer to 4.1%, per futures contracts tied to the fed-funds rate.
Behind those moves: data showing persistent economic strength that could lift inflation. Treasury yields, a benchmark for borrowing costs, surged last week after Fed governor Christopher Waller cautioned against rushing to cut rates. Yields’ climb continued after data on retail sales, housing starts and unemployment filings all beat economists’ projections. The 10-year U.S. Treasury yield finished the week at 4.145% after starting the year at 3.860%.
Traders are now betting inflation will average above 2.4% over the next five years, the highest level since November, based on swap contracts tied to the consumer-price index.
The Russell 2000 index of small-cap stocks—which gained 22% in the last two months of the year—is down 4.1% in January. Speculative stocks have taken a beating; both Rivian and Coinbase have lost more than 25% after rising during the Fed-pivot rally. A KBW index of regional banks, which added 31% in November and December, has slid more than 3%. Shares of real-estate and utility companies are down even more, also having surged in those months.
The Bloomberg Barclays aggregate bond index, which soared in the final months of last year, is down 1.4% to start 2024.
“People tried to front-run the rate cuts by buying long-duration assets, like tech stocks and bonds,” said Nancy Davis, founder of asset management firm Quadratic Capital Management. “What if the Fed doesn’t cut that much or that quickly? Those people get hung out to dry.”
The Atlanta Fed’s GDPNow model shows the economy likely grew at a 2.4% inflation-adjusted pace in the fourth quarter. That is nowhere near the conditions that have historically necessitated rates coming down 1.5 percentage points—which traders were betting on heading into 2024.
The extra compensation investors receive for buying high-quality corporate bonds over Treasurys is slimmer than before the Fed began raising rates, now around a percentage point. Credit spreads on junk bonds are similarly tight, signaling little concern over company defaults. Leveraged loans—used to fund private-equity buyouts or finance poorly rated companies—are in such high demand that companies are slashing their borrowing costs.
Some investors believe a strong economy could still boost stocks.
Sophia Drossos, an economist and strategist at Stamford, Conn.-based hedge fund Point72, expects robust consumer spending—and a proactive Fed—to help avert a recession and prop up corporate profits. The strong underlying U.S. economy “means risky assets can benefit,” Drossos said.
Not everyone is optimistic. Some fear new sources of inflationary pressure, such as trade disruptions from the Houthi attacks in the Red Sea and a drought in the Panama Canal.
And technical factors also could undermine the market gains. Interest-rate bets often represent investors protecting their portfolios against the risk of a recession or crisis that requires sudden rate cuts. Without a major slowdown, investors might remove those hedges, raising market rates. That could tighten financial conditions and disrupt stocks without any fundamental changes to the economic outlook.
But considering the strength of the economy, many doubt rate cuts will be as aggressive as investors hoped just a few weeks ago, threatening one of the rally’s biggest pillars of support.
“You’d think the wheels would have to come off to see that number of cuts,” said Fincher.
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Randy Boyagoda’s new novel, “Lords of Serendipity,” delivers a biting satire of cheating, politics and dysfunction across modern universities.
5 min
Administrative cowardice. Rampant cheating. The soaking and scamming of undergrads and grad students. Performative wokeism. Intensifying competition for international tuition dollars from an expansive China.
These are either the latest dire headlines about American higher ed or the myriad subplots of “Lords of Serendipity,” an ambitious new novel by Randy Boyagoda. Unlike most campus fiction, its scope extends well beyond the cloister of the liberal arts classroom to whammy the entire university system, from its financial model to its function within a globalized economy. Along the way, it skewers its lightning-rod targets with a precision too sharp to be considered entirely fictional.
That its author is not only well-versed in satire, having written four other novels in the genre, but is also a professor of English at the University of Toronto and an experienced college administrator, further blurs the lines between comic fiction and brutal fact. It’s the kind of no-holds-barred book only a consummate insider would know to write—but only one who is also conveniently outside the American university system could get away with writing.
“This is someone who’s got the inside dope on what can go on at universities, especially with international students, and what kind of con games are going on,” said Margaret Atwood, a friend and fellow Torontonian.
The novel, like Boyagoda himself, is often very funny—even as the dilemmas its characters face read as tragedy. Its cast includes the bickering members of a Sri Lankan hotel cleaner’s family, insecure American freshmen, dead-end third-tier college professors and their highflying Ivy League counterparts and dispirited university functionaries. An old-fashioned Dickensian tale, it sweeps across continents and campuses, from a classic liberal-arts college to a stand-in for Harvard University to an urban technical school to the dilapidated buildings of a state-run university in Sri Lanka.
“I’m a joyful person,” Boyagoda said in an interview, though he prefers to see his outlook on academia as “hopeful” rather than optimistic. He smiles and laughs frequently. He bikes everywhere. He derives energy from his students and from his four daughters, ages 14 to 20. They help him and his American wife, Anna, also an educator, care for Boyagoda’s father, an immigrant from Sri Lanka who has dementia and lives with the family.
The germ of the novel came to Boyagoda during the pandemic, when he was serving as a vice-dean. An urban legend was circulating about a statistics grad student selling passing grades to international students. The cheating scheme itself may well have been apocryphal, but it felt tantalizingly plausible.
“As a novelist, it stayed with me,” Boyagoda said. “Who would sell grades for a stats course? Why would someone buy grades? What’s motivating them? Why wouldn’t the university be doing something about it?” What he didn’t want to do, he explained, was write “another novel about a creative writing professor and his drama with students.”
In addition to writing novels—the first of which was a finalist for Canada’s prestigious Giller Prize; he’s written eight books in total—Boyagoda teaches literature full-time. For his students next semester, kids raised in a purportedly “post-literature era,” he’s assigning three 700-page novels, he noted mischievously, books by George Eliot, Ralph Ellison and Kiran Desai.
On RateMyProfessors, students remark on Boyagoda’s heavy assignments, tough grading and distaste for cellphones, but also hail his “comedy.” When alerted to these reviews, Boyagoda laughed. “Guilty as charged,” he said.
“Randy’s one of those people in academia who is very well educated but doesn’t have an ounce of superiority about him,” said John Irving, who frequently guest lectures in Boyagoda’s classroom. “It’s amazing to see how willing students are to talk in his classrooms, how little afraid they feel of being mocked or put down—he gets complete candor out of them.”
Negotiating competing interests seems to come naturally to him. Like many college campuses, after the Oct. 7 Hamas attack on Israel, the University of Toronto was embroiled in protests, encampments and discord; part of the school’s response was to convene a working group on civil discourse. Boyagoda was put in charge, serving for two years. It’s the kind of thankless task many professors would flee from, but Boyagoda relished the prospect and thinks the group, which is ongoing, made progress.
He has since pivoted to another formidable academic concern: the waning prestige of the humanities. In July, Boyagoda became the director of the Jackman Humanities Institute and special advisor on the humanities to the dean of arts and science. This fall, he is starting a series of gatherings he calls the Dead Book Club. (Dead writers feature heavily among his favorites: St. Augustine, Dante, William Faulkner, Evelyn Waugh, Saul Bellow.)
“The goal is to encourage students to read for its own sake and have conversation for its own sake,” Boyagoda said. “The importance of the humanities will be revealed to those who participate.”
“Lords of Serendipity,” which publishes next week, reflects Boyagoda’s commitment to the pursuit of knowledge: “I’m supposed to say I learn more from my students than they do from me, but no,” Boyagoda said. “I enjoy sharing my excitement and joy about literature and ideas. There are these moments when you are teaching and you can see someone’s face change because they didn’t know something and then they did. That moment when you’re actually watch someone enlarge themselves is deeply satisfying.”
In literary circles, Boyagoda is often referred to as a Catholic novelist, a description he embraces. “A novelist willing to give shape and voice to contemporary religious experience is needed,” Boyagoda said. “I understand myself as a Catholic novelist, provided that I’m not only a Catholic novelist, I’m also a South Asian novelist and I’m a Canadian novelist. I don’t want to be captive to one label.”
His characters, he said, are subjected to what he calls “Graham Greene character situations.”
“They are trying to do good in a fallen world and realize the most they can do is less harm than someone else would do in that same role,” he explained. “They have to accept they are complicit in something that provides some good thing to others. It’s a very Graham Greene way of thinking about sacrifice.”
The campus green they inhabit is a febrile zone in which lofty ideals and cynicism regularly collide. It’s a place where a traditional holiday college celebration is now an occasion for political protest. Kids freely police one another inside and out of the classroom with social media their constant, ready weapon of choice. International students, knowing their family’s financial futures hinge on their degrees, operate in terror of failure and deportation.
Early readers of the book include Gary Shteyngart and Junot Diaz, both of whom have taught at universities and written comic novels. They each contacted Boyagoda midway through to say, in essence, “You nailed it.”
As biting as “Lords of Serendipity” can be, Boyagoda’s faith in higher education remains undaunted.
“It’s absurd that we live in societies that make the decision to take people between the ages of 18 and 22, when they are most physically capable of contributing to our nations and communities, and tell them, ‘Go away for four years, and read and learn and have conversations,’” he said. “I want students to be aware of what an incredible privilege that is.”
Corrections & Amplifications
Randy Boyagoda is a special advisor on the humanities to the dean of arts and science at the University of Toronto. An earlier version of this article incorrectly said he is a special adviser to the dean of humanities. (Corrected on Sept. 2)
