Editor's note: The Federal Reserve will do whatever it takes to fight inflation... That's what we've seen over the past few years, given how the central bank's ever-evolving rate-hike strategy has raised consumer costs. But with the Fed's recent shift toward cutting rates, investors aren't sure where the market is headed next. So in today's Masters Series, originally from the October 16 issue of the Chaikin PowerFeed e-letter, Marc Chaikin – founder of our corporate affiliate Chaikin Analytics – explains why the Fed's inflation pivot shouldn't scare you out of investing...
Don't Let Rate-Cut Confusion Fool You By Marc Chaikin, founder, Chaikin Analytics Stocks have been grinding higher recently... The S&P 500 Index closed at a record high earlier this month. It's up around 8% in the past three months. Put simply, we're still in a bull market... a market that turned two on October 12. According to JPMorgan Private Bank, the median bull market since 1950 has lasted about three years and 10 months... with a median return of 110% versus the current 62% gain since October 12, 2022. So, I see more upside ahead. But there's a problem... The Federal Reserve is cutting interest rates with no recession in the U.S. economy and inflation under control. And the market isn't quite behaving the way the Fed had hoped. The U.S. 10-year Treasury bond yield has actually risen about 40 basis points ("bps") to around 4% since the Fed's 50 bps rate cut in September. The bond market looks at the employment number... September job creation of more than 250,000 jobs (with July and August numbers adjusted higher by 70,000) indicates a strong economy with no recession looming. Beyond that, third-quarter earnings season began a few weeks ago when JPMorgan Chase (JPM) and Bank of New York Mellon (BK) reported strong numbers. Earnings season should be positive for stocks, as analysts have set a low bar by cutting estimates. And gross domestic product forecasts for the third quarter are now up to 3.2% growth. That makes for some rate-cut confusion... Will the Fed pause its rate cuts? Will inflation come back? Well, don't get hung up about whether there will be a pause in rate cutting in November, as so many folks are. I'll explain why... According to JPMorgan Private Bank, since 1980, five of the 10 best years in the S&P 500 have come when the Fed cuts rates in a strong economy – when there hasn't been a recession. Those years were 1985, 1989, 1995, 1998, and 2019. Stocks were up more than 26% for the year in all of them. And stocks posted more gains into the following year. As I said earlier, the median length for bull markets since 1950 is about three years and 10 months, with a median return of 110%. Factoring that in, my conclusion is clear... This bull market has more room to grow over the next 12 months. As I've said numerous times this year in Chaikin PowerFeed, my 2024 target for the S&P 500 has been 5,800 to 6,000. Considering the shorter-term outlook, third-quarter earnings season has begun with a bang after the major banks beat expectations. Analysts have been cutting their third-quarter earnings estimates for the past two months. That's because second-quarter results were disappointing – particularly in the tech sector. Analysts have also been downgrading more stocks than they've been upgrading. Now, take those two negatives and turn them on their heads... because they're contrary indicators. The bottom line is that stocks rally overall during the roughly six weeks of each earnings season... when analysts have been "bearish" on earnings trends. This is another reason to expect a strong market after the U.S. presidential election into year-end. I also continue to believe that the market will rotate into the other 493 stocks in the S&P 500... beyond the so-called "Magnificent Seven" tech mega caps. And I expect the market to rotate into more small-cap and mid-cap stocks as well. The recent rally of more than 2% in the small-cap Russell 2000 Index signals that trend. Putting it all together, I'm still "bullish" on stocks... I expect strong third-quarter earnings reports. I also expect the strong election-year cycle to propel the stock market to new highs into the end of the year. Good investing, Marc Chaikin
Editor's note: Marc has predicted almost every major market move of the past four years – including the 2020 and 2022 crashes, the top stocks of 2023, and this year's bull run. On Tuesday, October 29, he's stepping forward to help you prepare for a historic "disconnect" he sees shaping up in the markets. This powerful strategy could potentially double or triple your money by helping you spot the biggest buying sprees on Wall Street before they occur. Get the full details here... | 
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