Fed's Rate Cut Could Trigger Stock Market 'Melt-Up', Warns Investment Strategist

BY Benzinga | ECONOMIC | 05/08/24 10:26 PM EDT

Investment strategist Ed Yardeni has sounded a warning about the potential for a stock market “melt-up” driven by Federal Reserve rate cuts.

What Happened: Yardeni, a seasoned market expert, has highlighted the re-emergence of the “Fed Put” concept, which suggests that the Fed will intervene with interest rate cuts to prevent economic downturns. This, he says, could lead to a stock market melt-up, reported Business Insider.

Yardeni’s clients were informed that the Fed’s potential monetary easing through interest rate cuts could unleash a surge in the stock market, potentially propelling the S&P 500 to record highs by the year’s end.

“Investors’ expectation that the Fed would nip a recession in the bud by easing means that the Fed Put is back,” Yardeni told clients in a note on Tuesday. “Its return reduces the risk of a recession and a bear market. It increases the risk of a melt-up in the stock market.”

However, the strategist also cautioned that a stock market melt-up could be followed by a sharp decline, posing a dilemma for investors.

“We don’t expect any recession this year that the Fed would have to address by easing. But since some investors think that may happen, the Fed Put is back. With it comes increased risk of a stock market meltup,” Yardeni said.

See Also: Jim Cramer Advises Investors To Brace For Economic Slowdown, Shares Tips To Maintain Balanced Portfolio: ‘I’m Not Telling You To Relax’

Why It Matters: The potential for a stock market melt-up comes amid a complex economic landscape. The U.S. government is currently paying an unprecedented $2 million per minute in interest on its national debt, a figure that is expected to continue rising, sparking a debate on Wall Street about the impact of higher interest rates on the economy.

Yardeni’s concerns are compounded by the ongoing economic slowdown, which has been highlighted by Jim Cramer, the host of CNBC’s “Mad Money.” Cramer has advised investors to brace for potential losses and diversify their portfolios to navigate the challenging period.

Meanwhile, Federal Reserve Chairman Jerome Powell is under intense scrutiny as the U.S. presidential election approaches. Market experts are questioning his ability to remain independent of political pressure, especially with the 2024 elections on the horizon.

Furthermore, economist Mohamed El-Erian, Chief Advisor at Allianz, has raised concerns about the Federal Reserve’s data-dependent approach following the April U.S. jobs report. He suggests it could cause further disruptions in global markets.

Read Next: ‘Wise Indeed:’ Tesla CEO Elon Musk Concurs As Billionaire Investor Stanley Druckenmiller Gives Bidenomics An ‘F’ And Slams Excessive Government Spending

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In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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