An interest-rate cut from the Federal Reserve is all but certain.
That wasn’t the case a few months back. But in a press conference last month, Fed Chairman Jerome Powell laid out the justification for lower rates.
This is a big change. The Fed was in the process of hiking rates to start the year.
Now it’s taking the opposite approach… setting the stage for an interest-rate cut.
This is a good thing for the market. Based on decades of data, it could mean a 24% rally over the next year.
Let me explain…
Fed chairs are notoriously vague about their intentions. But Powell’s June comments were clear enough to make a believer out of Jan Hatzius, chief economist at Goldman Sachs and possibly the best macro strategist on Wall Street.
For some time now, Hatzius has tended to be more hawkish (thinking rates were going up) about his Fed outlook. He was calling for rate hikes late last year when his competitors had already shifted to calls for a hold.
For much of this year, he has kept up his hawkish attitude, saying the Fed would remain on hold.
But following Powell’s commentary, Hatzius dramatically changed his tune. He now says the Fed will likely cut rates by 0.25% in both July and September. (Fed members will be hitting the beaches in August.)
Hatzius’ 180-degree turn is a big part of why market expectations for a cut have jumped. Fed funds futures are now saying the market sees a 93% chance of a rate cut at the July FOMC meeting. Futures traders also expect a 67% chance of a second rate cut at the September meeting.
And note, this is even after the stellar jobs report for June came out. A stronger economy typically means there’s less chance of a rate cut – so Powell’s words made a big impression.
So if you buy into Hatzius’ view that at least one cut is coming, what does that mean?
Well, for that I’ll turn to market strategist Tony Dwyer of Canaccord Genuity, one of my favorite strategists…
According to Dwyer, in the 12 months following a first rate cut when the economy was not in recession, the Dow Jones Industrial Average went up an average of 24%. In the 12 months following a first rate cut when there was a recession, the Dow went up an average of 11%.
Given that we’re not in a recession, we should be looking at some pretty hefty gains in the year ahead if the Fed does cut rates this month.
And remember, thanks to the Fed’s change in tune, Dwyer and Hatzius both think that’s a near-certainty.
The best thing to do today is to position yourself ahead of this looming interest-rate cut. You want to be long stocks now, before the Fed cuts rates and this historical precedent sets in.
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Source: Daily Wealth