As we head into the second quarter of the year, the Federal Reserve may find itself with new incentives to cut rates even deeper. According to Canaccord Genuity’s Tony Dwyer, a deteriorating jobs market and easing inflation could be the driving forces behind the Fed’s actions. Dwyer believes that the Fed needs to be more aggressive in its approach, although he does not advocate for rates to go back down to zero.
Dwyer points out that falling employment survey participation rates are impacting the accuracy of the Bureau of Labor Statistics’ jobs report data. He emphasizes that it is not a case of data manipulation, but rather a lack of a robust collection mechanism. As a result, significant revisions to the data have mostly been negative. With the next monthly jobs report due soon, the focus remains on the necessity of rate cuts.
During the March Federal Reserve policy meeting, officials discussed the possibility of slashing rates three times in the year, marking the first cuts since 2020. Dwyer predicts that these rate cuts will benefit financials, consumer discretionary, industrials, and health care stocks. He urges investors to consider buying into a broader theme of weakness rather than focusing solely on mega-cap weighted indices, as history suggests that such a concentration in a few stocks is not sustainable in the long run.
Dwyer foresees a shift in market performance towards a more even distribution by the end of the year and into 2025. He believes that the earnings growth participation will broaden, moving away from reliance on the “Magnificent Seven” – top-performing tech stocks like Alphabet, Amazon, and Apple. Despite the impressive performance of these stocks so far this year, Dwyer suggests that the market may be due for a correction, especially given the recent record highs in the S&P 500.
Dwyer advises caution for investors, particularly those who have seen significant gains in recent months. He warns against becoming overly optimistic in a market that is showing signs of being overbought. Instead, he suggests waiting for a better opportunity, which may coincide with further rate cuts driven by worsening employment data. This cautious approach reflects concerns about the broader economy and the need for the Fed to take decisive action.
The Federal Reserve’s approach to rate cuts and the changing market dynamics suggest a challenging and uncertain road ahead for investors. By staying informed and adaptable, investors can navigate these choppy waters and position themselves for potential opportunities in the future.