Fed should cut rates slowly for healthier market: Strategist

The NASDAQ 100 (^NDX) is beginning to pull back Wednesday morning after record highs in the stock market. The tech sector, which has led the recent rally, is beginning to slow, with some on Wall Street expecting a correction.

Ned Davis Research Group Chief US Strategist Ed Clissold joins Yahoo Finance to explain the pullback and how it may drive Fed policymaking.

Clissold signals the market's health: "It's an ongoing bull market. The concern right now is, 'Is the economy too strong for the Fed to cut rates?' That's actually a pretty good place to be. We think the Fed maybe will cut maybe a couple of times this year but, in fact, the market has done better when the Fed has cut slowly, up about 24% in the next year, that's not a forecast, just the average historically, versus 0.5% when the Fed has cut quickly, 5 or more times in a year, so this actually a pretty good place to be... If there's a pullback, that could be healthy for the long term, but big picture, things are in pretty good shape."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

SEANA SMITH: Big tech giving back some of yesterday's gains. You're looking at a drop of just about a half of a percent here for the NASDAQ 100 at the open. The move this morning coming off a record-setting day for the market. The S&P 500 still hovering not too far from yesterday's record level, just trading just below the flat line here in early trading.

We want to bring in Ed Clissold. He is Ned Davis Research Group's chief US strategist. Ed, it's great to have you here. So we saw another move to the upside yesterday with the S&P closing at another all-time high. Some give back in early trading action today. But take a step back, how does this set us up here to the action that we will likely see play out in the coming weeks?

ED CLISSOLD: Yeah. It's an ongoing bull market. You think about the concern right now is, is the economy too strong for the Fed to cut rates? That's actually a pretty good place to be. And we think the Fed will cut maybe a couple of times this year. But in fact, the market has done better when the Fed has cut slowly, up about 24% in the next year. That's not a forecast.

That's just the average historically versus up only 5% when the Fed has cut quickly five or more times in a year. So this is actually a pretty good place to be. Short-term we've come a long way. There's lots of optimism. If there's a breather, a pullback, that may actually be a healthy thing for the long term. But big picture, things are in pretty good shape.

MADISON MILLS: So Ed, what's the catalyst here? Why did we see so much green after that hotter than expected inflation print and then we're seeing this pullback today? What is the reason?

ED CLISSOLD: Well, I think the initial reaction was, uh-oh, this is a repeat of last month, where it's a hotter expected inflation number. But the market really prices in the same news the same way. We've already gone through that discounting of moving out. A month ago, the market was looking for five, six, maybe even seven rate cuts coming up.

And now we're the market's pricing in three. Maybe that's a little bit too much. But the market's moved to where the Fed has told it it wanted to be the whole time. And so given the fact we've come a long way, there's lots of optimism in the market right here, take a breather, wouldn't be too surprising.

SEANA SMITH: How would you then position, Ed, at this point if we're going to see a bit of a breather here in the markets, what adjustments should investors then be making to their portfolio because of that?

ED CLISSOLD: Sure. If you're a short-term trader, maybe consider if you don't have a lot of exposure to what we call the short sectors. That staples, health care, utilities, and telecom. At this point in the cycle, particularly during election years, during the second quarter, they tend to outperform. Again, that's a shorter term perspective. Longer term, still stay cyclical.

But that's a way to maybe get into some areas that have underperformed over the past several months. Even going all the way back to the bull market that started in 2022, it's been historically weak for those areas. So if there is going to be a little bit of rotation defensively if the market takes a breather, those are the areas we would focus on.