After a four-year hiatus, the Federal Reserve cut interest rates by 50 bps this week. The rate cuts made the markets bullish, as the Nasdaq Composite soared 440 points on Thursday. In addition, the Dow Jones Industrial Average spiked 522 points, while the S&P 500 index rose nearly 100 points on Thursday’s closing bell. The bullish thesis is back, as leading US stocks are making the index surge.
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Market Reactions And Analyst Warnings
However, prominent stock market bull and the Head of Fundstrat Tom Lee has warned investors not to take entry positions. Lee explained that the timeline between the rate cuts and the elections in November 2024 could be a bull trap. He stressed that leading stocks could experience extreme volatility and it’s best to invest when things settle down.
Tom Lee’s Perspective
“This Fed cut cycle I think is setting the stage for markets to be really strong over the next one month or next three months,” said Lee to CNBC. He added, “But, what the stocks do between now and let’s say election day, I think is still a lot of uncertainty. And that’s the reason why I’m a little hesitant for investors to dive in.”
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Besides Lee, several other analysts have acknowledged that leading stocks could turn volatile during presidential elections. The volatility usually peaks in mid-October, just weeks before the November elections.
Small Cap Stocks Could Rise Next
Source: Reuters / Andrew Kelly
The head of Fundstrat explained that small-cap stocks could benefit the most from the rate cut. Lee called the rate cuts a “cyclical boost to the economy,” as consumers experience a drop in mortgages, auto loans, and credit cards. “All these are big tailwinds for small caps,” he said.
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With election-related volatility ahead, the US and global stocks could be affected. The Presidential candidates, Donald Trump and Kamala Harris, have differing economic views.