Don't worry too much! The "Fed Put" may be back

According to Tom Lee, the chief strategist at Fundstrat, the "Fed put" is back, and stock investors may not have fully digested this good news yet.

The renowned stock bull points out that the Fed may take further measures to ease monetary policy whenever there are signs of weakness in the stock market. This idea has been shattered over the past two years as the Fed actively raised rates to control inflation.

However, Lee stated in a report that creating a supportive atmosphere for stocks may once again become the Fed's top priority.

"Most importantly, the 'Fed put' is back. This means the Fed's primary task now is to support a strong labor market," Lee wrote, noting concerns that weakness in more job positions could signal an upcoming economic recession. "This means the Fed wants a healthy economy."

Lee mentioned that a healthy economy depends on consumer and business confidence, which is closely tied to the stock market. He indicated that even with a 10% pullback in the stock market, businesses may become more cautious, potentially leading to more layoffs.

Lee further added that a 30% stock market decline would "almost certainly" lead to an economic recession, as it would impact the job market and household wealth.

"We believe the Fed does not want the S&P 500 to fall," he said. "The Fed may find that a 27% stock market decline in 2022 supported their efforts to control inflation and manage inflation expectations, a scenario that no longer exists."

Lee stated that a supportive Fed is a significant positive for stocks, but investors may not have fully absorbed this yet, predicting further upside in the stock market ahead.

Historically, the stock market has responded well to Fed rate cuts. Since 1971, the first Fed rate cut has almost 100% boosted the stock market in the following six months, with an average increase of 13%.

Lee mentioned that given some investors believe the economy is already in a recession, while he disagrees, there is still room for "positive surprises" in the stock market.

A survey conducted by Affirm shows that despite stable GDP growth, three-fifths of Americans believe the U.S. is already in a recession.

Finally, Lee said that rate cuts could boost durable goods, auto sales, and housing sales, thereby lifting the overall economy. He added:

"Remember, the Fed is dovish, and they are focused on maintaining a strong labor market. We may see volatility in the next 8 weeks, but this is also happening against the backdrop of a very strong stock market in 2024."