The stock market has found itself in a bout of volatility recently – but that all could change in about two weeks when the Federal Reserve cuts interest rates for the first time in this cycle.
While the S&P 500 is up more than 15% so far in 2024, pretty much all those gains came in the first half of the year. Over the past two months, stocks have gone essentially nowhere. Going into the Fourth of July weekend, the S&P 500 was trading at 5540. Today, it is trading at 5520.
Sixty days later. Zero upward progress.
Stocks are stuck.
They may get unstuck in about two weeks if the Fed cuts rates.
The recent lack of upward progress across the stock market can be attributed to one thing: recession fears. The economic data has weakened meaningfully over the past two months, with the unemployment rate rising about 10%, job openings falling about 10%, and real-time estimates for GDP growth dropping nearly 10%. The economy is clearly slowing.
But the economy itself is slowing for one reason: high interest rates.
The Domino Effect That Will Reignite the Economy
High rates have frozen the real estate market. They’ve also frozen the automotive market, the home repair market, and the construction and manufacturing industries. High rates have made it hard to borrow money and made it expensive to pay off debt, leading to a major slowdown in consumer spending. They’ve delayed big-ticket purchases like travel. And they’ve compelled people to save money in high-interest savings accounts.
High rates have slowed the economy.
A reduction in rates will therefore reinvigorate the economy.
Sure, one rate cut won’t do much to unfreeze the housing or automotive markets. Nor will it reenergize consumer spending or create significantly better borrowing conditions. But 10 rate cuts will. And that’s exactly what we think will happen in the next year.
The current Fed Funds rate is 5.25%. That is far too high. The current Consumer Price Index – or CPI – inflation rate is 2.9%. We will get the latest update of that number next week, and real-time estimates suggest it will fall to 2.5%.
In rate-cut cycles, the Fed likes to often reduce the Fed Funds rate to at least the inflation rate. With inflation running at 2.5%, that means the Fed will likely reduce the Fed Funds rate from 5.25% to around 2.5% over the next year. That means at least 10 rate cuts – which is roughly what the futures market is pricing in for the path of rates over the next year and change.
It is widely expected that the Fed will cut interest rates in two weeks at their September meeting. If we’re right, that will be the first of 10 cuts into summer 2025.
Those 10 cuts will make a difference for the economy.
Those 10 cuts will unfreeze the housing and automotive markets. They will breathe life back into the construction and manufacturing industries. They will make it much easier to borrow money and pay off debt. They will reenergize consumer spending. They will compel consumers to make big-ticket purchases.
They will make a difference.
And that’s why, in about two weeks, stocks are going to get unstuck.
The market already knows that that first cut won’t happen in isolation. It’ll be followed by a second cut in November. Then a third cut in December. And fourth cut in January. So on and so forth.
The market knows this, and as such they’re just waiting for the first domino to fall. Once it does with the Fed’s first official cut in about two weeks, I suspect you’ll see a mad dash with traders rushing to pile back into stocks on the idea that lots of rate cuts are coming, the economy is going to meaningfully strengthen, and stocks are going to soar.
That’s my take on the current situation.
The Final Word
Stocks have been stuck in neutral for the past two months. I think they’re about to wake up in a big way. If I’m right, a lot of money could be made in the markets between now and the end of the year.
And that’s why I’m putting together an urgent strategy session next week for folks, to help them prepare for this major economic event.
We plan to address all this and more in our urgent briefing this coming Wednesday, Sept. 11, at 8 p.m. ET, aimed at helping you prepare for this rare economic dynamic.
A little before 8 p.m. ET, I’ll send you an email with the subject line [The Great Tech Reversal of 2024]: Your Access Link. To join me, you’ll just click the link in that email.
To make sure you get that email, just reserve your spot for my briefing by clicking here.
Most importantly, at this briefing, we plan to unveil a game plan to help you potentially profit from this rare economic dynamic.
So don’t run away from the current market volatility because September is usually a bad month for stocks.
Rather, embrace it. Attend our special briefing this coming Wednesday, Sept. 11, at 8 p.m. ET. And learn how to potentially turn this volatility into profits.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
P.S. You can stay up to speed with Luke’s latest market analysis by reading our Daily Notes! Check out the latest issue on your Innovation Investor or Early Stage Investor subscriber site.
