Investors seem to think that in order for stocks to rally in 2024, the Fed needs to cut rates five, six, or seven-plus times.
But we don’t believe that’s true.
Instead, stocks simply need the economy to keep growing and the Fed to cut rates a handful of times. If both things happen, stocks should soar.
And this past week, it became clear to us that we will get both of those things. That means stocks should soar in 2024.
A Strong Consumer in a Robust Economy
The U.S. economy remains in a very healthy position. According to the most recent jobs report, the economy added a jaw-dropping 353,000 new jobs in January. And wages rose 4.5% year-over-year. In other words, Americans have jobs, and they’re also getting raises.
That’s a positive combination for continued strength in the economy.
After all, consumer spending drives 70% of U.S. economic activity. If consumers are employed and getting raises – and wage growth is outpacing inflation, which is true these days – then those consumers will keep spending. And if they keep spending, the economy will keep turning.
So, the data strongly supports the notion that the U.S. economy will keep growing in 2024.
Fed Rate Cuts Are Coming
At the same time, after the U.S. Federal Reserve’s January meeting, Board Chair Jerome Powell confirmed rate cuts are coming. He explicitly said that the central bank does intend to lower interest rates once it’s confident that inflation is on a sustainable path to 2%.
And according to the Personal Consumption Expenditures Price Index (PCE) – the Fed’s preferred inflation measure – inflation was at 2.6% in December. Based on projections from the Cleveland Fed, the PCE inflation rate is expected to fall to 2.2% in January and 2.1% in February.
In other words, by the spring, the Fed should feel pretty confident that inflation is sustainably moving toward 2%. That’s when the central bank will start cutting rates.
Therefore, it seems increasingly likely that over the next 12 months, we will get both continued economic growth and a few rate cuts.
Sure, it won’t be six or seven cuts. But history shows we don’t need that many.
Over the past 25 years, there have been three periods when the Fed cut rates while economic growth was still positive: in 2019, 1998/99, and 1995/96.
In all three periods, the Fed only cut rates three times. And each time, it was enough to spark major stock market rallies.
That’s why we think the idea that the stock market needs the Fed to “rescue it” with six-plus rate cuts is nonsense.
The Final Word
The economy is strong, and it should stay that way. Add in a few rate cuts, and voila – you have a cocktail for major stock market gains.
Of course, the investment implication here? Stay invested in the market and buy all dips as they emerge, specifically in AI stocks.
We’re confident that this bull market will be led and dominated by AI stocks.
If you’re invested in the top AI stocks, you’ll give yourself the chance to make tons of money in this new bull market. If you’re not, you’ll miss out.
Check out some of the top AI stocks on our radar today.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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