Subdued Inflation Spurs Hope for Rate Cuts: CFRA Insights

We're joined by Sam Stovall, chief investment strategist at CFRA Research. Sam, it's great to have you on the show. What is today's inflation data mean for stocks? Well, Chris and I think is giving investors a reason to breathe a sigh of relief because the concern was that we would end up seeing something that would surprise us with stronger inflationary numbers. But because we had earlier in this week some softening and economic data such as durable orders, etcetera, combined with a lower than expected PCE reading, I think investors are once again thinking that we could see Fed rate cuts not only in December, but also in September. Yeah, being the the Fed's preferred inflation gauge, do you think this makes it more likely that there are two cuts this year? Yes, I do, Dave. We've been saying for a while that we think there'll be two cuts this year, four cuts in 2025, S the Fed realizing that what it's aiming for is on the other side of the horizon. It ends up taking 18 to 24 months before whatever changes in monetary policy starts to affect the overall economy. So even though we probably won't be at the preferred level for year, year on year PCE until 2025, the Fed probably will start cutting rates in September of this year. Sam, I'm curious as to how the stock market does usually perform after that first rate cut. We've seen impressive gains this year and I think many investors wondering, can the pace of these gains continue? Well, not at this pace. History basically says that we tend to be more interested in what we want rather than what we have. In the 11 months that typically spread between the last rate hike and the first rate cut, the S&P was up 15% in that period, with the market higher in six of seven observations going back to the late 1980s when the Fed started announcing Fed fund rate changes. Yet in the six months after the Fed started to cut interest rates, the market was only up a little more than 5%, and of those prior, 6/4 of them were higher. So the the market, in a sense, tends to sell off on the news if the concern is that the Fed waited too long to start cutting rates. What's your forecast for the second-half, Sam? Oh, I think it ends up being a, a pretty good second-half. I mean, history tells us that whenever we've had a a top ten first half that the second-half has been higher nine out of 10 times for election years going back to World War 2 with the average gain being in excess of 5%. But I do think however, that we are likely to see increased volatility because seven of these 10 observations had declines exceeding 5% within them. Yes, we did tend to recover by the end of that period. So the the market will likely be higher, but I definitely think that volatility will be on the uptick. Sam, is there anything that you heard in last night's first presidential debate this time around that would impact stocks? Well, historically the market, if it's been higher in the July 31 through October 31 period, the incumbent has been reelected. Yet traditionally, whenever the market was down in that three month period, the incumbent was replaced. When I was listening to the debate last night and also reading the report from CFR as Washington Analysis, a political survey group, really now it looks as if it'll could end up being a Republican sweep. So that's reminding me of 1980 when Ronald Reagan beat Jimmy Carter. And even though we did have the replacement of the incumbent, the market rose quite substantial eventually in that three month period. We also had a third party candidate back in 1980 with John Anderson. So that could affect results as well. DJT stock up 8% in the early, early going. I think the markets pretty well saw what happened last night. Just as an American, Sam, what was your reaction to that debate and what we saw last night? Well, my, my reaction is that, you know, first of it would be nice if we all if we got the facts straight from the candidates to us. But at the same time, you know, I want to make sure that whoever is our leader is one that not only would stand up against the contender in a debate, but would be able to stand up against other world leaders should need be interesting. So in terms of what we see playing out in the market, Sam, is it in tandem with what we usually see during election years? It is because surprisingly election years have done very well. Going back to World War 2, whenever we had an election year that started with a positive January, the market was higher 100% of the time and the average gain was about 15 1/2 percent. So we're basically there right now in terms of price change through the first half. And as I said, we'll probably see a little bit higher by the end of the year, but with much more volatility. So election years do end up being more positive than than people remember. The gains have been driven for the most part by 1 stock Invidia, 30% of the S&P gains this year. Does it need to broaden out? Do you expect it to broaden out this rally? I believe that we do need to see it broaden out in the second quarter. While the S&P 500 posted a gain of 4.3%, which is an above average return for the second quarter. Really the the motion was driven by technology itself and I really do sort of question whether a jumbo jet can remain aloft on only one propeller 1 jet. So my my feeling is that we probably will end up seeing this resetting of the dials, this five plus percent decline to take place probably starting sometime in the third quarter, but then have it be fairly swift and sharp and then we recover by the end of the year. So in that recovery period, if this bull market is likely to continue, we will need to see a broadening of the participation. Sam, based on the data, are there certain stocks or even sectors or indexes that you think are undervalued and could be buying opportunities right now? Well, one group that I do like because it would benefit if either a Democrat or a Republican were elected to the White House, is defense. Not not defensive, such as consumer staples, but rather defense. On an ETF level, the ticker is XAR, which is the aerospace and defence ETF. This is a group that obviously would benefit from more defence spending. Other companies, General Electric, General Dynamics, Transdyne, TDG would benefit mainly because of the troubles that we've been seeing with Boeing and the need for the replacement parts, original equipment parts to be supplied because Boeing is not able to deliver the orders of The Jets that had been placed a while ago. So increased defense spending for General Dynamics and General Electric and replacement parts for Transdyne. To that end, that would be an undervalued sector, as you see it. Is anything flashing a clear sell signal to you? We had seen a headline recently that hedge funds for instance were taking some profits in high Flyers like NVIDIA. Well when you look at the S&P 500 trading at a 33 1/2 percent premium to its twenty year average forward PE, that does indicate A cause for concern. The growth group is trading at a 57% premium to its long term average and tech is at a 66% premium. And by the way, the highest PE sense the tech bubble burst in 2000. So I would tend to say that while we continue to favorite tech over the during 12 month period, I think it could be pretty tough sledding over this coming quarter. Sam Stovall, Chief Investment Strategist at CFRA Research, as we round out the first half and prepare for H2.