-
Central bankers might want to support stocks, consistent with Fundstrat’s Tom Lee.
-
That’s because the Fed wants a “healthy economy,” an unlimited component of which is a sturdy stock market, he said.
-
Rate cuts have been historically positive for stocks, leading to a mean six-month gain of 13%.
The “Fed put” is back, and stock investors might be not fully pricing in the good news, consistent with Fundstrat’s head of research Tom Lee.
The distinguished stock bull pointed to the concept central bankers could move to further ease monetary policy at any sign of weakness inside the stock market. That notion had been dashed over the past two years, since the Fed aggressively hiked rates of interest to control inflation.
Yet, a supportive environment for stocks may thoroughly be high on central bankers’ agendas again as they prepare for what’s vulnerable to be the first rate cut since 2020, Lee said in a note on Wednesday.
“Foremost, the Fed ‘put’ is back. Meaning the Fed’s mandate is now primarily supporting a strong labor market,” Lee wrote, pointing to fears that more jobs weakness could signal an oncoming recession. “Meaning the Fed wants a healthy economy.”
A healthy economy, though, hinges on consumer and business confidence, which is actually tied to the stock market, Lee said. Even when stocks were to see a ten% correction, businesses could turn into more cautious, he said, suggesting they might lay off more staff.
A 30% stock decline would “almost guarantee” a recession due to the impact on the job market and household wealth, Lee added.
“We predict the Fed doesn’t want the S&P 500 to falter,” he said. “The Fed in 2022 probably found the 27% decline of stocks as supporting their try to regulate inflation and manage inflation expectations. This can not be the case any longer.”
A supportive central bank is majorly bullish for stocks, but investors probably haven’t priced that in yet, Lee said, predicting more upside on the best way through which for equities.
Stocks have historically reacted well to Fed rate cuts. Since 1971, the first Fed cut has led to positive returns for investors 100% of the time in the next six months, with a mean gain of 13%.
There’s also room for a “positive surprise” in stocks, Lee said, provided that some investors consider the economy is already in a recession, some extent Lee disagrees with.
GDP growth has been stable, but three out of 5 Americans consider the US is already in a downturn, consistent with a survey conducted by Affirm.
Finally, rate cuts are vulnerable to boost durable goods, auto sales, and housing sales, which should bolster the broader economy, Lee said.
“Bear in mind the Fed is dovish and there’s a take care of keeping labor markets strong. We may thoroughly be seeing turbulence for the next 8 weeks, but this might be inside the context of a extremely strong stock market in 2024,” he added.
The Fed will announce its rate decision at 2 p.m. ET on Wednesday. Investors see 100% odds of a cut but are split on how big it’s going to be, pricing in a 65% likelihood the Fed could trim rates by 50 basis points, consistent with the CME FedWatch tool.
Read the unique article on Business Insider