Fed at a Crossroads: Why Three Rate Cuts Could Still Fuel the 2024 Market Rally

The financial world held its breath as Jerome Powell stepped to the podium last Wednesday. With inflation still hovering above target and economic growth showing signs of cooling, the big question remains: Will the Fed really deliver three rate cuts this year? Despite the market's recent jitters, there's a compelling case that not only are three cuts still in play—they could be the rocket fuel that launches stocks to new all-time highs.

Reading Between the Fed's Lines

The latest FOMC statement was a masterclass in central bank ambiguity, but the clues are there for those who know where to look:

1. The Dovish Undertones:

   Removal of "additional policy firming" language.

   Acknowledgment that job gains remain "strong" but are "moderating"

   Powell's admission that inflation doesn't need to hit 2% before cuts begin.

2. The Economic Reality Check:

   Q1 GDP growth slowed to 1.6% (from 3.4% in Q4 2023).

   Core PCE inflation cooled to 2.8% (still high, but trending down)

   Credit card delinquencies hitting 12-year highs signal consumer stress.

3. The Political Calendar:

   November elections create pressure for preemptive economic support.

   Historical precedent: The Fed cut rates in 2019 despite strong data.

Why Three Cuts Are Still Probable

The market has recently dialed back expectations, pricing in just 1-2 cuts. But here's why the original three-cut forecast might still hold:

1. The Real Rates Problem With inflation falling and nominal rates holding steady, real rates are becoming restrictive. At 2.8% core PCE and 5.25% Fed funds, real rates stand at 2.45%—well above the neutral rate estimated at 0.5%. This tightening is already slowing the economy.

2. The Labor Market Loosening

• Job openings per unemployed worker fell to 1.3 (from 2.0 peak)

• Wage growth cooling to 4.1% (from 5.9% in 2022)

• Quit rate back to pre-pandemic levels

3. The Banking Wildcard Regional banks (NYSEARCA: KRE) are sitting on $650B in unrealized losses. One more crisis like March 2023 could force the Fed's hand.

Sector Spotlight: Biggest Winners From Rate Cuts

If the Fed does cut three times, these sectors could outperform:

1. Growth Stocks Come Roaring Back

• Mega-Tech (NVDA, META): Lower rates boost long-duration cash flows $NVIDIA(NVDA)$ $Meta Platforms, Inc.(META)$

• Biotech (XBI): Funding environment improves dramatically

• Cathie Wood's ARKK: Speculative growth thrives in easy money eras

2. The Consumer Revival Trade

• Homebuilders (LEN, DHI): Mortgage rates falling below 6% would be huge

• Auto (F, GM): Average car payment at $735 needs relief

• Retail (TGT, COST): Discretionary spending gets a boost

3. The Yield Curve Play

• Banks (JPM, BAC): Steeper curve helps net interest margins $JPMorgan Chase(JPM)$

• REITs (AMT, PLD): Commercial real estate breathes easier

• Utilities (NEE, DUK): Debt-heavy sector gets reprieve $NextEra(NEE)$

The Bear Case: Why It Might Not Happen

Before loading up on rate-sensitive names, consider these risks:

1. Sticky Services Inflation:

   Shelter costs still rising at 5.7% annually.

   Healthcare inflation accelerating.

2. Oil Price Surge:

   Brent crude back above $90.

   Middle East tensions could spike prices.

3. Fed Credibility:

   Cutting too soon could re-anchor inflation expectations higher.

Historical Precedent: What Happens After First Cut?

Since 1980, the S&P 500 has averaged:

• +3% in the month following first cut

• +15% over the next 12 months

• Only 1990 saw negative returns (due to Gulf War)

The exception? When cuts came too late (2001, 2008). That's why Powell wants to get ahead of it this time.

How to Position Your Portfolio

For the Conviction Investor:

• Buy long-duration tech (MSFT, GOOGL) $Microsoft(MSFT)$

• Add small-cap ETFs (IWM) as they're most rate-sensitive

For the Cautious:

• Barbell approach: Half in cash (earning 5%), half in equities

• Buy defensive growers like COST, PEP

For Traders:

• Sell puts on beaten-down regional banks

• Buy September call spreads on homebuilders

The Bottom Line

While the Fed may delay the first cut to September, the trajectory remains downward. Three cuts in 2024 could prove conservative if unemployment ticks up or inflation falls faster than expected. For investors, the key is positioning early—by the time the first cut arrives, much of the upside may already be priced in.

The market's recent pullback looks more like a buying opportunity than a warning sign. As the old Wall Street adage goes: "Don't fight the Fed." And right now, the Fed is getting ready to shift from fighting inflation to fighting economic slowdown.

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