The Federal Reserve may have new incentives in the second quarter to cut rates deeper this year according to Canaccord Genuity’s Tony Dwyer. Dwyer believes that a deteriorating jobs market and easing inflation will ultimately push the Fed to act more aggressively, although he does not suggest that rates need to go back to zero. He points to falling employment survey participation rates skewing the Bureau of Labor Statistics’ jobs report data as a reason for concern, with significant negative revisions. Dwyer believes that rate cuts are necessary in response to this data.
At the March Federal Reserve policy meeting on interest rates, officials tentatively planned to slash rates three times this year, the first cuts since March 2020. Dwyer expects these rate reductions to give a boost to financials, consumer discretionary, industrials, and health care stocks, which have been performing positively this year. He advises clients to buy into the broadening theme on weakness instead of simply adding to mega-cap weighted indices. Dwyer believes market performance will become more even by the end of this year and into 2025.
Dwyer notes that the market performance is benefiting from a broadening of earnings growth participation, rather than just focusing on the “Magnificent Seven” stocks. The “Magnificent Seven,” consisting of Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla, have outperformed the broader market this year, with a 17% increase compared to the S&P 500’s 10% rise. Despite the S&P 500 closing at a record high and posting its strongest first-quarter gain in five years, Dwyer suggests waiting for better opportunities when the worsening employment data leads to rate cuts.
Dwyer emphasizes the need to consider the broader economic landscape and potential risks when making investment decisions. He advises caution when the market is overbought and extremely high, suggesting that a better opportunity may arise when there is worsening employment data leading to rate cuts. Dwyer’s approach focuses on staying informed about economic conditions and being prepared to act strategically in response to changing market dynamics. Overall, Dwyer’s perspective suggests a proactive and nuanced approach to navigating the current economic environment.
