With big rate cuts on the books, Tom Lee says the ‘Fed put’ is back
The Federal Reserve’s big rate cut this week has brought the concept of the “Fed put” back to the stock market, said longtime bull Tom Lee. As the central bank shifts its focus from fighting inflation to supporting the economy and the labor market in particular, it signals a crucial moment for investors no longer facing a restrictive Fed, according to the director of research at Fundstrat Global Advisors. “For risk assets in general, the Fed put is back. That is, the Fed’s mandate is now primarily to support a strong labor market,” Lee wrote to clients on Friday. “We think the Fed doesn’t want the S&P 500 to slow down. This is the Fed put — since the beginning of the inflation war, this has not always been the case.” Policymakers this week approved a half-percentage-point, or 50 basis points, cut in the benchmark overnight lending rate, the first cut in more than four years. Generally, a “put” refers to the Fed’s desire to ease financial conditions, which in turn supports riskier assets like stocks. In the current case, Lee, despite his caution in today’s markets, sees the rate-cutting strategy as supportive for stocks for three reasons: Stocks have historically rallied when the Fed cuts; a “positive surprise” could hit the market with many people thinking the economy is in or near a recession; and there’s “a real tailwind from the Fed’s cuts.” In particular, he cited “a significant lifeline” for three sectors that Lee said are actually in recession: durable goods, auto sales and housing. “Each of these three sectors will get a meaningful boost in affordability when the Fed starts cutting rates. This is a long-winded way of saying the Fed is not ‘forcing,’” Lee wrote. The strategist reiterated his call that small-cap stocks will benefit the most, with gains also likely for financials, AI, Ozempic-related stocks and cryptocurrencies.
