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The Fed must ‘kill the zombie’ with a high-interest-rate recession before investors should jump in to buy more stocks, strategist says

There will be a recession in 2024Getty Images

  • Investors should wait for a recession and associated rate cuts before pouring more money into stocks, says Canaccord’s Tony Dwyer.

  • He describes the US economy as a “zombie” that must be “killed” before a recovery can begin.

  • In such a scenario, the Fed would leave rates high for longer to trigger a downturn, then cut rates, Dwyer says.

The Fed must kill the half-dead US economy by keeping rates higher for longer to trigger a recession — and only then should investors pour more money into the market, according to Tony Dwyer, Canaccord’s chief market strategist Genuity.

Speaking to CNBC on Thursday, Dwyer pointed to signs of weakness in the economy, with some forecasters warning that a recession could be around the corner. That’s actually good news for investors, Dwyer said, as a recession is the buying opportunity investors should be waiting for:

‘You have to kill the zombie. And the zombie is an economy waiting for you [a downturn] because of the yield curve inversion and higher interest rates slowing down enough to enter a recession,” he said. “When you get lower inflation and lower interest rates, and you start to worry that unemployment is going to rise, that sets the stage for that real early cycle recovery.”

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Fed officials have raised rates by 525 basis points to lower inflation, a move that threatens to push the economy too far into recession.

A slew of weakening data points point to a slowing economy. For example, while the unemployment rate remained at a record low in February, that’s partly because the Bureau of Labor Statistics saw only a 27% response rate from companies in its latest jobs report, Dwyer said, suggesting that working conditions were weaker than they appeared. on paper.

Corporate earnings also appear to be struggling, Dwyer says, as most of the 2023 earnings growth came from the Magnificent Seven, a group of mega-cap tech stocks that soared on Wall Street’s enthusiasm for AI. Excluding these seven stocks, earnings growth in 2023 was negative — and estimated to be negative for the current quarter as well, he said, citing LSEG data.

And while stocks have hit a string of all-time highs this year, not all parts of the market are doing well. For example, small-cap stocks haven’t performed nearly as well as the S&P 500, with the Russell 2000 up just 5.5% from year-to-date levels.

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A slowing economy could prompt the Fed to cut interest rates – the monetary easing tool that investors have been eagerly awaiting. According to CME’s FedWatch tool, markets largely expect the Fed to cut rates by 75 basis points or more this year.

“At this point, when you’re so overbought and so extremely upside, you just want to wait for a better opportunity, and in our view that comes with worsening employment numbers that drive interest rates down, and you worry about the economy – that’s if I want to go in,” Dwyer added.

Some Wall Street forecasters have warned that interest rates could stay higher for longer as the Fed looks to avoid a resurgence in inflation. But that would only lead to a more severe recession for the economy as growth is already slowing, Dwyer warned.

Although more and more economists have prepared for the prospect of a soft landing, there is still a significant chance that the US will enter a recession next year. One economic indicator, called the ‘full model’, shows that the economy has an 85% chance of a recession in the next twelve months, the highest probability of a recession since the Great Financial Crisis. The New York Fed, meanwhile, predicts a 58% chance of a recession by February next year.

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