Bears, Avert Your Eyes

By TradeSmith Research Team

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We’re witnessing one of the fastest risk-on rallies in years.

And I think it’s just the beginning of what’s coming.

Not only has the Dow Jones Industrial Average clocked a new all-time high… but down-and-out small caps did something extraordinary.

In less than two months, the Russell 2000 went from a 52-week low on Oct. 23 to a 52-week high on Dec. 15. Portfolios inflated practically overnight!

Once the Fed pivot was etched in stone, the hard-landing-recessionist playbook completely unraveled… sending bears back into hibernation.

Consensus now favors a high probability of a soft landing, with the U.S. set to avoid the most anticipated recession in history.

Congratulations if you kept a level head and bought stocks like we suggested months ago at TradeSmith Daily. Those rare windows of opportunity are few and far between.

And I’ve got some good news for you…

The bull party isn’t over. Far from it.

Today we’re looking at this precise “Goldilocks scenario” — how stocks perform whenever the Fed cuts interest rates and the U.S. dodges a recession.

That’s the favorable environment teeing up for 2024.

Bears who believe rate cuts are bad for stocks should avert their eyes… because the evidence signals massive upside next year.

Before we get to that powerful study, let’s review the current rate-decision landscape.

Stocks Do Well After the Final Rate Hike

Back in September, we studied the time it takes for the Fed to go from hikes to cuts.

As we highlighted, it doesn’t take long for policy to shift from a restrictive stance to an easier one.

Since 1957, the Fed has only waited an average of 4.2 months to start cutting once the final hike is in:

Given that July 27 marked the last hike, we’ve now eclipsed the 4.2-month average wait time for cuts.

But before you start buying the “higher for longer” narrative, it’s important to reference recent history.

Since the 1990s, we’ve experienced longer stretches between the final hike and first cut, to the tune of roughly 10 months.

With Wall Street consensus now forecasting the first rate cut hitting in March, that puts us on schedule to dial back interest rates at eight months… Very much in line with the recent three-decade average.

Those higher-for-longer warnings from the mainstream media just didn’t materialize.

Instead, we’re setting up for one of the best rocket-fueled environments investors could hope for: one where the Fed eases policy and the U.S. avoids a recession.

This may be the most important study you’ll see over the coming 12 months. Let me show you why.

Stocks Surge When the Fed Cuts Rates, Avoiding a Recession

A world with plentiful jobs, sinking inflation, and falling interest rates is a great situation. Those are the essential ingredients for crafting a soft landing.

Lucky for us, we’ve seen this movie before.

Since 1990, there’ve been three distinct periods when the Fed lowered interest rates and the economy avoided a recession:

  1. The Gulf War of the early 1990s
  2. The ’90s mid-cycle slump
  3. The global currency crisis of the late ’90s
Each rate-cut regime saw equities surge at a breakneck pace.

Consider these stats for the S&P 500 when a soft landing occurred:
  • A month later, stocks rip 2.1% on average
  • Six months later, they zoom 9.1% — with a 100% win-rate
  • 12 months later, stocks trounce historical averages with a 14.2% return

With green across the board, now you know why Wall Street is uber excited about a soft landing. It’s one of the most stimulating environments for the stock market.

This analysis suggests the latest bullish stampede is only getting started.

I believe a big year is coming for markets in 2024. And that means market-leading stocks are set to double and even triple under this backdrop.

If you have the guts… buy into the cuts!


Lucas Downey,
Contributing Editor, TradeSmith Daily