Stock investors face a gut-wrenching 3 months ahead after record market run

By Joy Wiltermuth

'There's this debate between a hard landing, a soft landing or no landing that continues,' says Lerner at Truist Advisory Services

U.S. stocks surged to fresh record highs in the wake of the Federal Reserve's first interest rate cut since the onset of the 2020 pandemic, before ending Friday mixed.

Friday's action put the three major U.S. equity indexes near record territory. The blue-chip Dow Jones Industrial Average DJIA ended at a fresh peak, a day after logging its first close above 42,000 for the first time in history.

Now comes the hard part, with initial reactions to the Fed's extra-large rate cut of the way. Focus next turns to whether September's rare bout of strength for stocks can carry through to year's end, especially with November's U.S. presidential election on the docket.

Keith Lerner, co-chief investment officer at Truist Advisory Services, thinks that stocks touching fresh records after the Fed's rate cut should reinforce the underlying positive trend for equities, especially after a strong first half to the year.

"I think the 50 basis-point move was the right move to make," Lerner told MarketWatch, calling it a "makeup cut" after the central bank kept rates steady in July when the Fed already was focused on a weaker labor market.

Jobs openings have been harder to come by lately and the unemployment rate has ticked up from pandemic lows to over 4%. "There's this debate between a hard landing, a soft landing or no landing that continues," Lerner said.

While the stock market isn't the economy, uncertainty about whether the U.S. could slide into a slowdown isn't going away soon for investors, according to Lerner, who thinks the market looks ripe for tumult over the next three months.

His base-case is for a recession to be avoided, with the economy eventually stabilizing at growth around 2% to 2.25%. The official scorecard of the economy showed second-quarter GDP expanded at a 2.8% annual pace.

And should the job market hold up, Lerner sees a path for the S&P 500 index SPX to carve out fresh highs around 6,000 before the year's out.

"But there definitely will be some gut-checks and bumps along the way," he said.

Read: Dow surges to record as investors celebrate Fed's 'recalibration' rate cut

Uncertainty isn't over

Stocks in recent months have been prone to sharp swings following a placid start to 2024, so much so that equities have been reacting explosively to economic data that previously hardly moved the needle.

"I suspect every, single data point is going to be overly analyzed, maybe more than it should be," said Gennadiy Goldberg, head of U.S .rates strategy at TD Strategy.

After the Fed's initial big rate cut on Wednesday, he said monthly jobs for September and October - due before the Fed's next policy meeting in November - will take on even more importance.

"I think there's a lot of uncertainty in the cadence going forward," Goldberg said of the size of potential rate cuts at the Fed's November and December policy meetings.

Still, the central bank's messaging around its initial cut "showed the equity market that the Fed is going to be quite reactive to any deterioration in the economy," he said, adding that Fed officials look eager to "right-size" their policy stance after keeping rates near their highest level in roughly 20 years to tame inflation.

Read: Labor market is not 'flashing red,' two top Fed officials say

Concerns about inflation have been on the back burner in recent months, but Fed governor Christopher Waller put them back on the map in a Friday interview with CNBC, only for a new reason.

Waller told the business network that, "inflation is softening much faster than I thought it was going to. And that is what put me over the edge to say, look, 50 is the right thing to do."

Read: Why Fed bets were so out of whack: Waller explains what put him 'over the edge' for a jumbo rate cut

Goldberg said the uncertainty has his clients looking to add duration while they can still get higher yields, with a focus on 2-year BX:TMUBMUSD02Y to 5-year BX:TMUBMUSD05Y Treasurys, which tend to be most sensitive to Fed rate cuts.

The 2-year Treasury yield slumped to 3.57% Friday, down from a high of the year above 5%, while the benchmark 10-year Treasury yield BX:TMUBMUSD10Y ended at 3.727% on Friday, climbing from a one-year low of 3.622% set earlier in the week.

"It really means going one day at a time," he said, adding that there's really no predicting the Fed's next steps, because even they don't know yet.

-Joy Wiltermuth

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

09-23-24 0833ET

Copyright (c) 2024 Dow Jones & Company, Inc.