Market strategist Jay Woods spoke with Benzinga ahead of Jerome Powell's Jackson Hole speech Friday to discuss a variety of topics: rate cuts, what the election means for stocks and what's next for small caps.
Fed Rate Cut
Woods says the Fed was late to raise rates and has been late to cut rates.
The expected rate cut by the Federal Reserve in September comes as investors try to predict what will happen to the stock market — especially with the 2024 presidential election playing out before the end of the year.
The market has not had an August/September stretch-up in the past three years, Woods said, adding that he doesn't believe it will happen by the end of September.
"Most markets bottom in October," Woods said on the Aug. 22 edition of PreMarket Prep.
When asked about the likelihood of a rate cut, Woods said there is 0% chance of no cut and that a cut should've already happened. He predicts the rate cut will more than likely be 25 basis points. A 50-point cut could play out too aggressively as a political move.
"Whatever happens, one side of the aisle is going to condemn him for cutting,” he said.
The question for investors, Woods said, is if the rate cut is “already baked into stock prices.”
“We already bought the rumor,” he added, citing how the other side of the popular phrase is “sell the news” and that's what might happen first.
Smart investors who bought the dip on Aug. 5 may want to lighten up as the market could get choppy and trade sideways, he warned. "I don't expect us to explode upward immediately on that initial rate cut on the 18th."
See below.
Small Cap Rally
Woods said when rates are cut in a non-recession time, the market typically rallies three months later, six months later and 12 months later.
One investment idea that often does well is small caps, an idea that Woods has been pounding the table on and shared with Benzinga previously.
Woods said small-cap stocks, which are commonly tracked by the iShares Russell 2000 ETF IWM have yet to make their all-time highs again.
"When they move, they move quickly," Woods said. Recall how small caps moved up 27% from October to December in 2023.
"The setup is there for small caps,” he added.
The past month has seen consumer staples and utilities outperform the magnificent seven stocks with the equal weight S&P 500, which is tracked by the Invesco S&P 500 Equal Weight ETF RSP, outperforming the S&P 500, which is tracked by the SPDR S&P 500 ETF Trust SPY.
"This is healthy, but it's not sexy."
Past Election Year Trends: Woods said he took a look at the 2016 and 2020 years to predict what happens in 2024, with 2020 having an outlier in the COVID-19 pandemic.
The Volatility Index, commonly referred to as the VIX, spiked early in both years and then again in September before the election.
"Headlines are going to cause a little angst," Woods said.
Woods recalled that both the 2016 and 2020 elections, each one involving Trump, were controversial.
"We rallied from Election Day into the end of the year," Woods said for 2016 and 2020 with Trump involved in both cases. "I think the setup is there."
SPY, IWM Price Action: The SPDR S&P 500 ETF Trust is up 1% to $559.31 on Friday.
The iShares Russell 2000 ETF is up 3% to $219.69 on Friday.
Watch the full interview with Jay Woods on PreMarketPrep here.
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© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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