Stock Market Outlook: March 2024 - NerdWallet (2024)

March Madness starts soon, and many gamblers will be putting money on the line in an effort to predict the outcome of the NCAA college tournament.

Futures traders will be doing the same — but about interest rate cuts, rather than basketball.

But the Federal Reserve isn’t the only thing in focus in this month’s outlook. We’re also taking a look at upcoming tech earnings and a controversial strategy for staying ahead of the market’s cycle of booms and busts.

In this issue

When will the Fed start cutting rates?

On March 20, the Federal Reserve will wrap up its second Federal Open Market Committee (FOMC) meeting of 2024 and announce a new interest rate decision.

It’ll either leave the federal funds rate at its current level of 525-550 basis points (5.25%-5.50%) or cut it by 25 basis points (0.25%).

We don’t know for certain what will happen at the March Fed meeting. But markets seem pretty sure that the answer is “nothing.”

Source: CME FedWatch. Data is current as of Feb. 29, 2024, and intended for informational purposes only.

The chart above shows the Chicago Mercantile Exchange’s FedWatch tool, which uses the federal funds futures market to show the odds of different interest rate scenarios. It’s kind of like using betting odds to predict the outcome of a game — it’s not foolproof, but it provides a very educated guess about an uncertain future event.

As of late February, FedWatch is showing a probability of less than 3% that the Fed will cut rates in March. But the next two Fed meetings are another story.

May or June?

After the March meeting, the Fed will announce its next interest rate decisions at the conclusion of its May 1 and June 12 meetings.

FedWatch data suggests that there will probably be no cut at the May meeting, either — but the odds aren’t quite as slim as for March, at the time of writing.

Source: CME FedWatch. Data is current as of Feb. 29, 2024, and intended for informational purposes only.

Things really start to get interesting when you look at the probabilities for the June meeting, however. At the time of writing, FedWatch gives the Fed a 51% chance of cutting rates by 25 basis points — and a 12% chance of cutting them by 50 basis points.

Source: CME FedWatch. Data is current as of Feb. 29, 2024, and intended for informational purposes only.

To summarize, federal funds futures markets are almost certain an interest rate cut is coming soon. They just don’t know exactly when — but at the moment, the odds point toward June 12.

Where to look for hints

Federal Reserve Chair Jerome Powell has made it clear that the FOMC primarily looks at economic data like the inflation rate when making interest rate decisions.

“We believe that our policy rate is likely at its peak for this tightening cycle and that, if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year,” Powell said in his press conference after the previous Fed meeting in January.

The most recent consumer price index (CPI) report showed a 3.1% inflation rate — still a little bit above-target. If the next few monthly CPI reports show an increase of less than 2% over the trailing 12 months, that could bolster the case for rate cuts in the near future.

Another hint about the Fed’s future decisions is the “dot plot” that is released after every other meeting, as part of the Fed’s summary of economic projections.

The dot plot shows each FOMC member’s individual opinions about where interest rates should be at the end of a particular year. The most recent dot plot, released in December, shows that the median FOMC member expects the federal funds rate to be around 4.6% by the end of this year. That implies the Fed would cut rates by 65 to 90 basis points over the course of 2024.

Source: Federal Reserve

Another dot plot is due after the March meeting, and if the median FOMC estimate for end-of-2024 interest rates is even lower, that could imply that the timetable for rate cuts has accelerated.

How might falling interest rates affect markets?

But the actual market effects of interest rate decisions are more complex, because investors tend to “price in” their expectations of what will happen ahead of time.

As we wrote in our February outlook, trading on financial news events like Federal Reserve decisions can be hard to do profitably, because the market prices in information very quickly.

However, this moment — the likely peak of interest rates for the time being — may be a good time to check whether your investment portfolio is diversified across both stocks and bonds.

Term of the month: Sector rotation

Which sectors do well at which times? Sector rotation is an investment strategy that tries to find out — and profit from that information.

What is sector rotation?

Sector rotation is an active investing strategy that involves moving money between sectors in an effort to keep it in the best-performing sectors at all times. It often uses exchange-traded funds (ETFs) that track specific sectors — such as tech ETFs or energy ETFs.

Sector-rotating investors often divide the business cycle — the never-ending sequence of economic booms and busts — into four phases that can be bucketed as follows: recession, bull market, peak and bear market. The idea is that specific sectors outperform the others at specific points in the cycle.

Which sectors outperform at which times? Depending on whom you ask, you’re likely to get a slightly different answer, and there’s some disagreement on whether one particular sector is a better option in the tail end of one phase or the beginning of another — but the table below highlights some popular theories.

Sector rotation ETFs

Some ETF issuers take the guesswork out of sector rotation for you by doing it themselves within a sector rotation ETF. The SPDR SSGA US Sector Rotation ETF (XLSR) and the Main Sector Rotation ETF (SECT) are examples.

Both use their own separate methodologies, but they have one thing in common — they’ve both underperformed the over the last year.

Does sector rotation work?

The fact that sector rotation ETFs underperform the S&P 500 is not the only mark against sector rotation strategies. In a widely cited 2007 paper, economists at Massey University in New Zealand examined U.S. stock returns between 1948 and 2006. They found that sector rotation strategies tend to underperform simpler strategies.

“We conclude that, contrary to conventional market wisdom, rotating sectors over business-cycles is unlikely to be an optimal investment strategy and question the widespread acceptance of sector rotation as a strategy that provides investors with relative outperformance,” the researchers wrote.

So sector rotation may not be a silver bullet, at least with the sector rotation methods we have today. It’s possible that some investor or economist could discover an easy and reliable sector rotation method in the future, but they haven’t figured one out yet.

Until then, investors may find it helpful to take one page from the book of sector rotation: Investing through ETFs. This is one easy way to provide investment diversification to a portfolio.

Dates that could move markets this month

Economic events

Earnings

Below is a table of blue-chip stocks that are reporting earnings per share (EPS) in March, with the dates and analyst estimates for their upcoming earnings reports, and the results of their previous earnings reports.

We’ve filtered the list for companies with a market capitalization of at least $100 billion — high-volume stocks whose earnings reports are often major trading events for options traders and day traders.

Neither the author nor editor owned positions in the aforementioned investments at the time of publication.