A Wall Street guru predicts a big rally after the Fed’s decision and his predictions back him up

This year, Lee predicted a strong 2024 for the stock market, although he anticipated a correction around February and March and that gains would be led by small-cap stocks.

So far, it’s been another strong year for the stock market — a much better look than its peers at JPMorgan and Morgan Stanley, for example — although the rotation into small-cap stocks It has only happened in the last month, and the correction came later than Lee anticipated.

The Fed meeting this Wednesday

Now Lee says the market will rally again after the Fed decision, with a possible gain of 4% to 5%, or even more.

“The key assumption is that the Fed is likely to commit to a rate cut in September of at least 25 basis points (1 cut). A larger cut is not necessary to consider,” says Lee.And while bond markets have priced in a 100% probability of this, equity investors probably won’t be convinced until the Fed confirms it as such..” Lee notes that the S&P 500’s five-day average return over the past six decisions was +2%.

He says this gain will be unusually strong because the Federal Open Market Committee has not yet reflected the consumer price index inflation numbers for May, which he described as “super soft,” nor the surprisingly soft CPI numbers for June. With the labor market and business activity generally slowing, that means there will be softer inflation ahead as well, Lee says.

In the lead-up to the decision, there has been a “painful” 5% correction in the S&P 500 and 10% in the Nasdaq 100, while the small-cap Russell 2000 has been flat. But over the past 24 months, when stocks were down ahead of the FOMC rate decision, they have rallied four of the five times outside of the 2022 hike cycle.

The Russell 2000, he adds, had traded at least 1% up or down in 11 of the past 12 sessions before Tuesday. That has only happened 10 times since 1979, and each year it happened — 1987, 1998, 2009, 2011 and 2020 — were clear “risk-on” and “start of cycle” years. Over a month, the signal has a 90% success rate, and it’s 100% for 3, 6 and 12 months. Over 12 months, those gains averaged 51%.

“Overall, we believe a moment of risk-on is coming. And this will be led by small-cap stocks. The body of evidence is growing for a significant move in small-cap stocks over the next 8 weeks,” he says.

U.S. stock index futures rallied on Wednesday as results from Big Tech offered relief from recent earnings concerns. Treasury yields were steady ahead of the Fed’s decision later Wednesday.

The Federal Reserve’s latest interest rate announcement is due later in the afternoon, with markets convinced that the US central bank will keep interest rates steady but suggest it could cut them as early as September.