Here is the biggest immediate risk to the stock market

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It’s a market hyper attuned right now to anything that suggests there won’t be a large number of interest rate cuts from the Federal Reserve in 2024.

Should that investment thesis be dinged, well, stocks will be dinged. As to the driver of that dinging? Hotter-than-expected economic data, which is currently unfolding.

A week ago, investors had to digest a stronger-than-expected Consumer Price Index (CPI) report. Markets sold off as rate cut bets were dialed back.

On Wednesday, markets had to wade through a retail sales report that suggested consumers were still rocking on, and thus inflation won’t fall so rapidly. Rate cut bets, you guessed, got pulled in.

Stocks were subsequently hit.

Over the last five trading sessions, the S&P 500 (^GSPC) is down by 0.5%. The more interest rate-sensitive Nasdaq Composite (^IXIC) is off by 1.2%, which I think supports the view of a market that has bet the house on a lot of rate cuts this year.

Bank of America CEO Brian Moynihan told Yahoo Finance Live at the World Economic Forum (WEF) this week that he’s in the camp of four rate cuts in 2024. That’s not exactly the six rate cuts many in the market were pricing in at the start of the year.

“And what you see from policymakers publicly are them not endorsing the idea that we’re going to get cuts in the next several months. And I mean, if I were a central banker, I’d probably also be a little bit more noncommittal until I was actually ready to cut pretty soon because you box yourself in by endorsing what is a fairly clear statement of where markets think things are going,” reminded Goldman Sachs chief economist Jan Hatzius in a chat at Davos.

Added Hatzius, “In terms of the way that people talk about the economy, it’s more optimistic than it’s been in a long time.”

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Hatzius still expects rate cuts this year, but isn’t in the six rate cuts camp either.

This spells a greater-than-average-risk situation as people try to understand the Fed’s thinking and incoming data, in this writer’s humble opinion.

Perhaps try to add some fixed income to your portfolio, pros told Yahoo Finance Live at WEF.

“Fixed income has historically done very well when the Fed has paused and begins their easing cycle, which is exactly where we find ourselves. And so if we’re going in that direction, fixed income, particularly investment-grade fixed income, is going to perform very well in that environment,” Guggenheim Investment Management chief investment officer Anne Walsh told us.

Read the latest from the World Economic Forum in Davos, Switzerland:

Brian Sozzi is Yahoo Finance’s Executive Editor. Follow Sozzi on Twitter/X @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations, or anything else? Email [email protected].

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