Rate cuts will continue to 'juice this bull market': Strategist

US stocks (^DJI,^GSPC, ^IXIC) are losing some steam after the S&P 500 notched its 41st record-high close of the year. However, Carson Group chief market strategist Ryan Detrick believes the post-rate-cut rally is here to stay. He joins Morning Brief to lay out his case.

Detrick believes that the Federal Reserve should have cut interest rates before September, explaining, "Inflation is last year's problem. So we don't need interest rates over 5% right now." While the labor market is slowing, he notes that initial jobless claims hit a four-month low last week.

"So are things perfect? No. Is the economy slowing down? Yes. Are we going into a recession? No, we don't think so. And we think these rate cuts are going to continue to kind of juice this bull market, honestly help this economy going forward," he tells Yahoo Finance.

He highlights that the Federal Reserve has cut rates when the S&P 500 was near all-time highs. In 1980, the Federal Reserve cut interest rates 20 times within 2% of the index's all-time high. "Are we going to have two back-to-back 20% years? It's looking like it. Will we have three? Probably not. But at the same time, double-digit returns this time into next year if the economy hangs in there, we think it's possible," Detrick argues.

He adds that small- and mid-cap stocks historically outperform when the Fed kicks off its rate-cutting cycle, and believes that investors could see 20% returns this time next year. Thus, he encourages investors to have diversified portfolios and rebalance every three to six months.

He explains, "Don't always chase a shiny object... We've been neutral technology most of this year. Three, four months ago, people thought we were crazy to say that. There are some really stretched valuations in technology, doesn't mean we don't like it. Again, we're neutral, but there's some other areas like financials (XLF), like industrials (XLI), small caps (^RUT), mid caps (^RUI), that are pretty cheap historically, and those areas we're overweight."

With the presidential election just a month and a half away, Detrick warns that October will be a volatile month. He notes that markets do not like uncertainty, thus, it will likely stabilize after the election. He adds, "The good news for investors out there, November historically is very strong in an election year, and December is too. So if we get some rockiness in October, that's OK."

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Melanie Riehl

Video Transcript

We have so losing some steam after 41 record high closes of the year.

But our next guest saying that history suggests that the rally is going to continue post fed rate cut joining us.

Now, I want to bring in Ryan Dietrich.

He was just slated from our very own Jared Blakey Ryan Dietrich is Carson Group's chief market strategist Ryan.

It's great to talk to you.

So you are very optimistic about where stocks are going ahead from here.

Why are you at all concerned that maybe the 50 basis point cut is a signal that things could be weaker than we thought on the, on the economic front?

Yeah, good morning everyone and, and glad to be back talking about stocks at new highs.

You know, we've, I've come on all year saying we're pretty optimistic that this is a bull market.

We're still in that camp.

Now, the big question, of course, they just did.

50 were of the opinion, they probably should have done 25 7 weeks ago.

So maybe they just brought the eraser out and the big argument is, is the economy slowing because yes, they cut 50 before in 2001 and 2007 and 100 year pandemic.

Not very good times.

Um But we still think again what I've said all year, the inflation is last year's problem.

Right.

So they, they, we don't need interest rates over 5% right now.

And you look at the economy, I could talk all day about this.

Keep it fairly simple.

Is the labor market slowing?

Yes.

But look at initial claims, one of the best indicators we have for real time, you know what's going on, the labor market hit a four month low just last week on one more thing.

Earnings, I mean, earnings do matter forward earnings on the S and P 500 is hit 267.

What in the world?

Does that mean it was 225 this time to start a 23?

So are things perfect?

No.

Is the economy slowing down?

Yes.

Are we going to into recession?

No, we don't think so.

And we think these rate cuts are gonna continue to kind of juice this um bull market honestly help this economy going forward to what extent?

I mean, what, what type of percentage have we seen in the past to suggest that we could see even more upside from here as I'm looking at some of the stats that Jared brought up and that you were posting about as well this week, 41 all time highs for the S and P 500 in 2024.

Yeah, 41 is an awfully lot extrapolates out up over 50 which will be one of the most ever.

But, you know, we, we took a look at kind of can the fed cut interest rates near all time highs?

Because people are wondering that.

Yes.

Is the answer?

I went back to the 1980 found 20 times they cut interest rates within 2% of an all time high, one year later, higher 20 times brad and the average return about 13 0.9%.

So let's just round it to 14.

Um You know, are we gonna have two back, back to back 20% years?

It's looking like it, right?

Well, we have three, probably not.

Um but at the same time, you know, double digit returns this time in the next year.

If the economy hangs in there, we think it's possible.

Now, one more comment on this, that's large caps, right?

I come on the all year.

So we like large, small caps.

We like mid caps, midcaps.

It's been our largest overweight all year.

And historically, when do those really start to outperform?

It's once the fed actually starts cutting, right?

We saw that big rally last year or late last year.

We thought um the fed would cut sooner than we had the, the jump in inflation and in the economic data, the first quarter this year, which pushed things back.

But now that the feds actually cutting, we think smaller mid caps will probably outperform large caps over the next year.

Brian, what does that upside look like, do you think?

Well, like I said, upside to the S and P 500 this time from right now, let's say, come back in 1212 months, right.

A year from now.

We wouldn't be surprised at all.

We had 12 to 15% returns on the S and P 500.

But small caps and midcaps honestly could probably be more than 20% or so low.

20% or so is what we think is uh is possible.

And that's the thing about this market, right?

I mean, everybody's like, oh, you know, large caps here and small caps, everybody's argue about everything.

I mean, sometimes a diversified portfolio sticking with kind of, you know, rebalancing every, every, you know, 36 months or so.

That's the best thing for a lot of investors out there listening.

I mean, don't always chase a shiny object.

We've been neutral last comment.

We've been neutral technology most of this year a couple, you know, 34 months ago, people thought we were crazy to say that there are some really stretched valuations and technology doesn't mean we don't like it again.

We're neutral, but there's some other areas like financials like industrial small caps, mid caps that are pretty cheap historical historically and those areas were overweight.

Ryan, are you just looking past the election?

And any uncertainty that that could cause given the fact that you are so optimistic about the returns that we could see over the next 12 months.

Can't we just look past the election?

Is that, is that ok?

Um Yes, you know.

Well, let's pull in, put it this way.

Um, the second half of September, like Jared just talked about a little bit is usually when the volatility happens.

Well, not so far this year, but it is October coming up the worst month in an election year, the most volatile month.

Historically, we're, we're thinking it makes sense.

We're gonna have that Tober election, whatever it might be some October volatility.

Just remember though, once you get through the election markets can take bad news, market can take good news.

They just don't like uncertainty.

We're gonna have a lot of that and the good news for investors out there.

November historically is very strong in an election year in December is too.

So if we get some rockiness in October, that's OK. One more thing on this, I mean, s and Bs up nine of the last 10 months.

All right.

The only month we've been down is April, which usually is a pretty good month.

So go figure there.

So we might be up 10 out of 11 months here if we're higher in uh September.

So this has been a great move.

Markets don't always go up.

Maybe we're due for that October volatility but again, bigger picture, we would be um actively buying any weakness for uh into year rally and even into next year, Ryan Dietrich of Carson Group, Ryan always a pleasure to catch some time with you.

I mean, I enjoy tracking your posts but it's better IRL or at least over the interweb in the metaverse or, you know, just this simul cask.

Thank you.