The stock market has found itself in a bout of volatility recently. But that all could change on Wednesday, Sept. 18, 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 around 5550.
Sixty days later, zero upward progress.
Stocks are stuck.
Though they’ll likely take off once the Fed cuts rates.
The recent lack of upward progress across the market can be attributed to one thing: recession fears. The economic data has weakened meaningfully over the past few months, with the unemployment rate rising about 10%, job openings falling about 10%, and real-time estimates for GDP growth dropping nearly 10%. Clearly, the economy is 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. Lofty rates have made it hard to borrow money and 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.
Therefore, a reduction in rates will reinvigorate it.
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 over 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 2.5%. In fact, August’s CPI data showed that on a three-month annualized basis, the inflation rate was just 2.1%. Excluding shelter costs, it fell all the way to 1.1%.
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% and dropping, the central bank 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 at its 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 and 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 and compel consumers to make big-ticket purchases.
We’re confident they will make a major difference.
And that’s why, in less than one week, stocks should 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 just held an urgent strategy session to help folks prepare for this major economic event.
Indeed, we addressed all this and more in our urgent briefing this past Wednesday, Sept. 11, at 8 p.m. ET, aimed at helping you prepare for this rare economic dynamic. Most importantly, we unveiled a game plan to help you potentially profit from it.
But if you missed this session, there’s still time to catch the replay.
Don’t run away from the current market volatility because September is usually a bad month for stocks.
Rather, embrace it. Watch the replay of our special briefing. And find out how to potentially turn this volatility into profits.
Learn how to best prepare for this potential market melt-up.
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.
