Editor's note: Without a recession, many folks aren't sure the Federal Reserve's interest-rate cut is a good thing. But as Marc Chaikin – founder of our corporate affiliate Chaikin Analytics – points out, some of the best-performing years in the market come during times like this. In this issue, originally published in the free Chaikin PowerFeed daily e-letter, Marc outlines the tailwinds that can drive the market to more new highs...

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 on Friday. It's up nearly 3% in the past month.

Put simply, we're still in a bull market. And this bull market turned two years old on October 12.

According to JPMorgan Private Bank, the median bull market since 1950 has lasted about three years and 10 months. And the median return is 110% versus the current 64% gain since October 12, 2022.

So, I see more upside ahead. But there's a problem...

You see, 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 10-year Treasury bond yield has actually risen more than 50 basis points ("bps") to above 4% since the Fed's 50 bps rate cut in September. Normally, we'd expect the 10-year yield to fall alongside the federal-funds rate.

But the bond market is looking at the employment numbers. More than 250,000 jobs were created in September (with July and August numbers adjusted higher by 70,000). That indicates a strong economy with no recession looming.

Beyond that, third-quarter earnings season began two weeks ago. This should be positive for stocks, since analysts have set a low bar by cutting estimates. And GDP forecasts for the third quarter recently went up to 3.2% growth.

All of this makes for rate-cut confusion. Will the Fed pause its rate cuts? Will inflation come back?

Well, don't get hung up about whether rate cuts will pause in November, as so many folks are...

According to JPMorgan Private Bank again, 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.

Remember, 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 my free Chaikin PowerFeed e-letter, my 2024 target for the S&P 500 has been 5,800 to 6,000. The index is now in that range.

Looking shorter term, again, third-quarter earnings season started off with a bang after major banks beat expectations. JPMorgan Chase (JPM) and Bank of New York Mellon (BK) reported strong numbers earlier this month.

Analysts have been cutting their third-quarter earnings estimates overall for the past two months. That's because second-quarter results were disappointing – particularly in the tech sector.

Analysts have also been downgrading their ratings on stocks more than they've been upgrading.

Now, take those two negatives and turn them on their heads... because they're contrarian indicators.

History shows that during the roughly six weeks of each earnings season, when analysts have been "bearish" on earnings trends, stocks rally overall.

This is another reason to expect a strong market after the presidential election through year-end.

I also expect 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 2%-plus rally in the small-cap Russell 2000 Index we saw on October 11 is an indicator of that trend.

Putting it all together, I'm still "bullish" on stocks...

And I expect a strong third quarter and the strong period of the election-year cycle will propel stocks to new highs into year-end.

Good investing,

Marc Chaikin

Editor's note: Despite these tailwinds, Marc is warning that investors have very little time to prepare for a historic "disconnect" in the markets... But he's not predicting a crash, a dollar crisis, or anything of the kind. Instead, it's a financial shift that could mean disaster for some – while for investors who know what's happening, it could be the greatest rapid-fire moneymaking opportunity of Marc's 50-year career. Click here to learn more.

Tell us what you think of this content

We value our subscribers' feedback. To help us improve your experience, we'd like to ask you a couple brief questions.