Note from Ashley Cassell, Managing Editor, TradeSmith Daily: Last we heard from Luke Lango, a senior analyst from our corporate partner InvestorPlace, he was sharing examples of AI stocks that he sees as the most promising investments once the Federal Reserve starts to cut rates.
Today, we're bringing Luke back to TradeSmith Daily to say more about why he sees the economic situation as so promising – while others are much more nervous about a potential recession undercutting all kinds of stocks.
Read on as Luke explains why that first rate cut will be the first "domino" to drop... reinvigorating all sorts of industries. It's a catalyst that Luke is very keen to trade in his services like Breakout Trader, where he's just published 3 Explosive Trades for the Coming Tech Reversal. |
A Historic Stock Market Rally Could Be Right Around the Corner By LUKE LANGO , SENIOR INVESTMENT ANALYST, INVESTORPLACE Last week was very rough for stocks – so rough, in fact, that history says it is time to buy. And, in fact, a promising contrarian buy signal has just emerged.
That is, the percentage of S&P 500 stocks advancing last week was below 7.5%: 
We've only seen three weeks like that since this bull market started in late 2022.
Each time, stocks were either at or close to a short-term bottom – and they always rallied nicely over the next few weeks.
We think all the stars are aligning for a "golden buying window" over the next few days.
That's because, on Wednesday, Sept. 18, the Federal Reserve is fully expected to cut interest rates for the first time since the COVID pandemic.
Once the Fed cuts rates, stocks will take off.
More than that, we expect Powell to sound extremely dovish Wednesday afternoon, convincing the markets that he has their back with rate cuts. Investors will be enthused, and the next leg of this stock market rally will begin.
That's why this is buying season. Between now and next Wednesday, we want to be strategic buyers of strong stocks. The Domino Effect That Will Reignite the Economy The recent lack of upward progress across the market can be attributed to one thing: recession fears.
The economic data has weakened meaningfully over the past few months, with the unemployment rate rising about 10%, job openings falling about 10%, and real-time estimates for GDP growth dropping nearly 10%.
Clearly, the economy is slowing.
But the economy itself is slowing for one reason: high interest rates.
High rates have frozen the real estate market. They've also frozen the automotive market, the home repair market, and the construction and manufacturing industries. Lofty rates have made it hard to borrow money and expensive to pay off debt, leading to a major slowdown in consumer spending. They've delayed big-ticket purchases like travel. And they've compelled people to save money in high-interest savings accounts.
High rates have slowed the economy.
Therefore, a reduction in rates will reinvigorate it.
Sure, one rate cut won't do much to unfreeze the housing or automotive markets. Nor will it reenergize consumer spending or create significantly better borrowing conditions.
But 10 rate cuts will. And that's exactly what we think will happen over the next year.
The current Fed Funds rate is 5.25%: far too high. The current Consumer Price Index (CPI) inflation rate is 2.5%. In fact, August's CPI data showed that on a three-month annualized basis, the inflation rate was just 2.1%. Excluding shelter costs, it fell all the way to 1.1%.
In rate-cut cycles, the Fed likes to often reduce the Fed Funds rate to at least the inflation rate. With inflation running at 2.5% and dropping, the central bank will likely reduce the Fed Funds rate from 5.25% to around 2.5% over the next year. That means at least 10 rate cuts – which is roughly what the futures market is pricing in for the path of rates over the next year and change.
It is widely expected that the Fed will cut interest rates at its September meeting. If we're right, that will be the first of 10 cuts into summer 2025.
Those cuts will make a difference for the economy.
They will unfreeze the housing and automotive markets and breathe life back into the construction and manufacturing industries. They will make it much easier to borrow money and pay off debt. They will reenergize consumer spending and compel consumers to make big-ticket purchases.
We're confident they will make a major difference.
And that's why, in less than one week, stocks should get unstuck.
The Fed follows Fed Chair Jerome Powell, and Powell's legacy is now on the line. Will he be the Fed hero who miraculously killed 9% inflation while keeping the economy turning? Or will he be the Fed zero who held rates too high for too long and plunged the economy into a recession?
The difference between him being a hero and a zero is how much he supports the economy with rate cuts over the next several quarters. Therefore, we think he is eager to support the economy with multiple rate cuts, and that any data he gets that allows him to do so, he will run with it.
The market knows this, and as such they're just waiting for the first domino to fall. The market already knows that that first cut won't happen in isolation. It'll be followed by a second cut in November. Then a third cut in December. And fourth cut in January. So on and so forth.
With the Fed's first official cut coming up, I suspect you'll soon see a mad dash with traders rushing to pile back into stocks on the idea that lots of rate cuts are coming, the economy is going to meaningfully strengthen, and stocks are going to soar.
That's my take on the current situation. The Final Word Stocks have been stuck in neutral for the past two months. I think they're about to wake up in a big way. If I'm right, a lot of money could be made in the markets between now and the end of the year.
And that's why I just held an urgent strategy session to help folks prepare for this major economic event. Indeed, we addressed all this and more in our free briefing this past Wednesday, aimed at helping you prepare for this rare economic dynamic. Most importantly, we unveiled an urgent game plan to help you potentially profit from it.
But if you missed this session, there's still time to catch the replay.
Don't run away from the current market volatility because September is usually a bad month for stocks.
Rather, embrace it. Watch the replay of our special briefing. And find out how to potentially turn this volatility into profits.
Click here to learn how to best prepare for this potential market melt-up. 
Luke Lango
Editor of Breakout Trader | 
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