Last summer, the U.S. Federal Reserve stopped raising rates after its most fast-and-furious rate-hike cycle in history. From March 2022 to July 2023, the Fed hiked by 525 basis points – all in just about 18 months. And since then, the stock market has been anxiously awaiting the central bank’s first rate cut.
And I predict that when that happens, it could unleash a huge stock market rally…
In fact, I think that will happen this summer.
I know; that may run counter to what’s being circulated in the mainstream media right now.
And I certainly understand why investors might be skeptical. After all, in last week’s updated Summary of Economic Projections, the Fed expressed that it’s planning to cut interest rates only once this year (down from a prior projection of three rate cuts). As such, the consensus fear right now is that the Fed may not cut interest rates at all in 2024.
But we think that interpretation stems from a misunderstanding about the most important factor in the rate-cut timeline.
In truth, it’s all about the data.
If the Fed Follows the Data…
Above all else in this rate-hike cycle, the Fed has consistently emphasized that it will be “data dependent.”
That is, its outlook is not set in the stone. The path forward for interest rates is not predetermined. Rather, the Fed will respond to incoming inflation and economic data to decide when to cut rates.
If the data runs hot, it’ll push back rate cuts. If the data turns soft, it’ll cut sooner.
And right now, the incoming data is very soft.
For example, just yesterday, June’s Empire State Manufacturing Survey results were released. This is one of the most important monthly business surveys, wherein the New York Fed assesses manufacturing businesses’ conditions in the Greater New York Area.
And according to that survey, inflationary pressures crashed in June to their lowest levels since summer 2023.
Specifically, the survey’s Prices Received index dropped from 14.1 to 7.1, its lowest level since July 2023. The 7-point drop also marks that index’s biggest decline since October 2023.
Inflation is both running soft and falling fast.
And for what it’s worth, this index has historically proven to be a very strong leading indicator for the all-important Consumer Price Index (CPI). If this relationship holds true, we can expect June’s CPI inflation rate to crash to or below 3% – which would be its lowest level since inflation became problematic in 2022.
The data is clear: inflation is rolling over.
The Final Word
But importantly, it isn’t just the inflation data that is softening. Broader economic data is softening, too.
Citi’s Economic Surprise Index – a benchmark for how the U.S. economy is faring relative to expectations – has collapsed below -20. That is one of the lowest readings of the past 10 years and the lowest reading since the Fed stopped hiking rates about a year ago.
Not to mention, the unemployment rate is starting to move higher. Weekly jobless claims have spiked to a nine-month high, and consumer confidence is absolutely crashing.
In our view, the data is telling the Fed that it can – and should – cut interest rates very soon.
So… if the Fed really is being data-dependent… then it’ll heed this recent spate of ultra-soft economic and inflation data. And it’ll cut sooner and more than everyone expects.
Right now, the market is pricing in ~60% odds of the first rate cut happening by September. I predict that as we move through July and August, those odds will move toward 70%, 80%, then 90% as the data continues to soften and the Fed continues to tip its hat toward a September cut.
As those odds rise, stocks should soar.
That means it’s time to prepare for this summer rally right now.
We’ve been fairly aggressive with our model portfolio recently and have issued a handful of new recommendations over the past few weeks.
Check out the top stocks we’re recommending right now.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
P.S. You can stay up to speed with Luke’s latest market analysis by reading our Daily Notes! Check out the latest issue on your Innovation Investor or Early Stage Investor subscriber site.