After soaring throughout most of the week, the stock market is back to trading sideways once again. But we don’t think this weakness will last – because in our view, the Federal Reserve will surely cut rates by September. And anticipation of that first Fed cut will lead stocks to rally strongly throughout the summer.
Indeed, we would be buyers on this dip because it seems a huge summer stock rally is on deck.
Not so sure? Just look at the data.
This week, we learned that, across the U.S. economy, inflation is once again in rapid decline.
In May, core consumer price inflation dropped to its lowest level since 2021. Supercore consumer price inflation – core services excluding housing, considered the stickiest part of inflation – fell month-over-month for the first time since 2021. Not to mention, producer price inflation unexpectedly dropped, as did import price inflation.
After a bumpy start to the year, inflation is once again sustainably falling toward 2%.
Now, inflation is still running at 3%, and the Fed’s target is 2%. Conventional wisdom implies that the Fed will wait until inflation drops to 2% before it starts cutting rates. And at the current pace of disinflation, that could take until the end of the year.
So – why would the central bank cut by September, before inflation actually falls to 2%?
The labor market.
A Rocky Labor Market Suggests the Fed Will Cut Soon
After all, the Fed has a dual mandate: stable prices and full employment. But the ‘full employment’ side of things is starting to look very shaky.
Last month, the unemployment rate rose to a fresh cycle-high of 4%. And this week, jobless claims rose to a nine-month high, suggesting the unemployment rate will rise even more in June.
Clearly, this labor market is cracking.
And today’s Consumer Sentiment Report from the University of Michigan suggests the cracks will deepen rapidly over the coming months. Consumer sentiment unexpectedly crashed to 65.6 in June, its lowest level since November ‘23. More worrisome, consumer sentiment is down 17% over the past three months. That’s its biggest three-month decline since summer 2022 and, before that, early 2020 at the onset of the COVID-19 pandemic.
In summer 2022, when consumer sentiment dropped this much over a three-month stretch, the Fed stopped hiking rates.
Similarly, after consumer sentiment plummeted in early 2020, the Fed cut rates.
Point being: During the past five years, whenever consumer sentiment has plunged this much over a three-month stretch, the Fed changed its policy stance.
And we think the same thing will happen this summer.
The Final Word
The incoming economic data leads us to believe that the labor market will continue to weaken. Inflation will continue to fall.
And both will happen much more quickly than the Fed anticipated – which will lead it to cut rates much sooner than anticipated, too.
That’s why we think the first rate cut is coming in September.
It’s likely that the market will increasingly come to that conclusion, too. As it does, stocks will soar ahead of what may be the most highly anticipated rate cut in the Fed’s history.
To prepare for that summer stock rally, we’re positioning our portfolios to potentially win big with top-notch AI stocks.
Learn about a few of the picks we’re recommending these days.
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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