The Federal Reserve is facing new pressure in the second quarter to consider deeper rate cuts this year. According to Canaccord Genuity’s Tony Dwyer, the deteriorating jobs market and easing inflation will play a significant role in urging the Fed to take action. Dwyer believes that while the Fed may not need to go back to zero rates, they do need to be more aggressive in their approach.

Dwyer points out that falling employment survey participation rates have been skewing the Bureau of Labor Statistics’ data on jobs reports. This issue has been leading to significant negative revisions in the data, impacting the overall outlook for the job market. Dwyer emphasizes the importance of focusing on these rate cuts as a necessary step in addressing the current economic challenges.

At the March Federal Reserve policy meeting, officials tentatively planned to slash rates three times over the course of the year. These cuts would mark the first since March 2020. Dwyer predicts that the rate reductions will benefit financials, consumer discretionary, industrials, and health care stocks. He recommends buying into the broadening theme on weakness rather than solely investing in mega-cap weighted indices.

Dwyer anticipates that market performance will become more evenly distributed by the end of the year and into 2025. He emphasizes a broadening of earnings growth participation beyond just the “Magnificent Seven” tech stocks. While these top seven stocks have outperformed the broader market this year, Dwyer believes that the overall market will shift towards a more balanced outlook.

Despite the S&P 500 closing at a record high and posting its strongest first-quarter gain in five years, Dwyer advises caution. He notes that the market is currently overbought and extreme to the upside, suggesting that investors should wait for better opportunities. Dwyer highlights the importance of monitoring worsening employment data as a potential trigger for further rate cuts and economic concerns.

Overall, the Federal Reserve’s decision to potentially cut rates deeper in the second quarter reflects the challenges posed by a deteriorating jobs market and easing inflation. Dwyer’s insights offer valuable perspectives on the importance of staying vigilant in the face of changing economic conditions and market dynamics.


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