The “Fed Put” is back. Here’s why central bankers will want to support the stock market, according to Fundstrat’s Tom Lee.

• Central bankers will want to support stocks, according to Fundstrat’s Tom Lee.

• That’s because the Fed wants a “healthy economy,” an important component of which is a strong stock market, he said.

• Rate cuts have historically been positive for stocks, leading to an average six-month gain of 13%.

The “Fed put” is back, and equity investors may not be fully pricing in the good news, according to Fundstrat’s head of research, Tom Lee.

The prominent stock bull underscored the idea that central bankers could further ease monetary policy at any sign of stock market weakness. That notion has been shattered over the past two years as the Fed has aggressively raised interest rates to control inflation.

However, a favorable environment for equities could be back on the agenda for central bankers as they prepare for what is likely to be the first rate cut of 2020, Lee said in a note on Wednesday.

“First, the Fed ‘well’ is back. That means the Fed’s mandate now primarily supports a strong labor market,” Lee wrote, underscoring fears that more weak jobs could signal a coming recession. “That means the Fed wants a healthy economy.”

A healthy economy, however, depends on consumer and business confidence, which is largely tied to the stock market, Lee said. Even if stocks had a 10 percent correction, companies could become more cautious, he said, suggesting they could lay off more workers.

A 30 percent drop in stocks would “almost guarantee” a recession because of the impact on the labor market and household wealth, Lee added.

“We think the Fed doesn’t want the S&P 500 to falter,” he said. “The Fed in 2022 likely saw the 27% decline in stocks as supporting their attempt to control inflation and manage inflationary expectations. This is no longer the case”.

A supportive central bank is largely bullish on stocks, but investors likely haven’t priced that in yet, Lee said, predicting more gains on the way for stocks.

Stocks have historically reacted well to Fed rate cuts. Since 1971, the first Fed tapering resulted in positive returns for investors 100 percent of the time over the next six months, with an average gain of 13 percent.

There is also room for a “positive surprise” in stocks, Lee said, given that some investors believe the economy is already in a recession, a point Lee disagrees with.

GDP growth has been steady, but three in five Americans believe the U.S. is already in a downturn, according to a survey by Affirm.

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Finally, the rate cut is likely to boost sales of durable goods, cars and homes, which should support the broader economy, Lee said.

“Note that the Fed is accommodative and the focus is on keeping labor markets strong. We could see turbulence over the next 8 weeks, but this is also against the backdrop of a very strong stock market in 2024,” he added.

The Fed will announce its rate decision on Wednesday at 2pm ET. Investors see a 100 percent chance of a cut but are split on how big it will be, pricing in a 65 percent chance the Fed will cut rates by 50 basis points, according to CME’s FedWatch tool.

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