The Federal Reserve’s big interest rate cut this week has reintroduced the notion of the ” Fed put ” into the stock market, longtime bull Tom Lee said. As the central bank pivots from a focus on fighting inflation to one of supporting the economy and the labor market in particular, it signals an important moment for investors who no longer face a restrictive Fed, according to the Fundstrat Global Advisors head of research. “As for risk assets broadly, the Fed ‘put’ is back. That means, the Fed’s mandate is now primarily supporting a strong labor market,” Lee wrote to clients Friday. “We think the Fed does not want the S & P 500 to falter. This is the Fed ‘put’ — since the start of the inflation war, this was not always true.” Policymakers this week approved a half a percentage point, or 50-basis point, reduction in the benchmark overnight borrowing rate, the first cut in more than four years. Broadly speaking, the “put” refers to the desire of the Fed to loosen financial conditions, which in turn supports risk assets like stocks. In the current instance, Lee, though cautious on the market now, sees the rate-cutting strategy as supportive of equities for three reasons: Stocks historically have gained as the Fed has cut; a “positive surprise” could come in the market with so many thinking the economy is in or near a recession; and there is “a bona fide tailwind from Fed cuts.” In particular, he cited “an important lifeline” to three sectors that Lee said actually are in a recession: durable goods, auto sales and housing. “Each of these 3 sectors will get a meaningful boost in affordability as the Fed starts cutting rates. This is a long winded way of saying the Fed is not ‘pushing on a string ,’” Lee wrote. The strategist reiterated his call that small-cap stocks stand to benefit the most, with gains also likely for financials, AI, Ozempic-related stocks and cryptocurrencies.
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