According to Tom Lee, chief researcher at Fundstrat, the “Fed put” is back, and stock investors may not have fully digested the good news yet.
The well-known stock bull noted that the Federal Reserve could take steps to further ease monetary policy at any sign of weakness in the stock market. That idea has been shattered over the past two years as the central bank has aggressively raised interest rates to keep inflation in check.
However, Lee said in a note that a supportive atmosphere for stocks could once again become a priority for the Fed.
“Most importantly, the ‘Fed put’ is back. This means the Fed’s mandate is now primarily to support a strong labor market,” Lee wrote, noting concerns that more weakness in job gains could signal an impending recession. “This means the Fed wants the economy to be healthy.”
Lee said a healthy economy depends on consumer and business confidence, which is largely tied to the stock market. He said even a 10% correction in the stock market could make businesses more cautious, suggesting they could cut more jobs.
Lee added that a 30 percent drop in the stock market would "almost certainly" lead to a recession because of the impact it would have on the job market and household wealth.
“We think the Fed doesn’t want the S&P 500 to go down,” he said. “The Fed may have found in 2022 that a 27% decline in the stock market supported their efforts to control inflation and manage inflation expectations, and that’s no longer the case.”
A supportive Federal Reserve is a major positive for stocks, but investors may not have priced that in yet, Lee said, predicting further gains for stocks ahead.
Historically, the U.S. stock market has responded well to the Fed’s rate cuts. Since 1971, the first rate cut by the Fed has boosted U.S. stocks in almost 100% of the cases in the following six months, with an average gain of 13%.
Lee said there is room for "positive surprises" in the stock market, given that some investors believe the economy is already in recession, which Lee disagrees with.
A survey conducted by Affirm shows that although GDP growth has remained stable, three in five Americans believe that the United States is already in a recession.
Finally, Lee said that rate cuts could boost durable goods, auto sales and housing sales, thereby boosting the overall economy. He added:
“Remember, the Fed is dovish and they’re focused on keeping the labor market strong. We may see some turbulence over the next eight weeks, but that’s also in the context of a very strong stock market in 2024.”
The article is forwarded from: Jinshi Data
