March 25, 2024

The current financial market is grappling with potential resistance to interest rate cuts. There has been a noticeable shift of investments into sectors such as small-cap equities and biotechnology, highlighted by advances made by the Nasdaq Biotechnology Index Fund ETF (IBB) and the Russell 2000 (IWM) in closing the performance disparity with Nasdaq 100 (QQQ) since the start of 2022.

While there has been a mild downturn in the ‘Magnificent Seven’ stocks, this has been cushioned by investors who are purchasing during these dips. The transition into different sectors has been mostly viewed positively in the market.

Despite this, the market now faces certain hurdles. One is a sudden reversal in the sector rotation after it has enjoyed a strong performance. There are also rising fears that the biotechnology sector could be overvalued and its growth possibilities capped.

Furthermore, the small-cap’s relative strength has been noteworthy, and the Russell 2000 Index seems set on challenging its December record highs. However, this segment is especially sensitive to changes in interest rates, and significant economic data is expected.

The market’s primary concern is the resistance to cuts in interest rates. Although the anticipation of the first interest rate cut has been postponed from March to June, the market has handled this well, driven by optimism that a recession can be avoided. The mitigating narrative of a ‘Goldilocks’ economy persists despite reluctance from the Federal Reserve to reduce rates.

Wednesday is expected to offer updated GDP data, mortgage applications, retail figures, and oil inventory data. The major economic news, however, will emerge on Thursday with the Personal Consumption Expenditures (PCE) inflation information. If recent inflation increases align with the PCE report, this will likely confirm a delay in rate cuts until June at least.

Now that earnings season has concluded, economic matters have taken center stage in market news. Opportunities for positive catalysts seem bleak, and with the market in an overextended technical condition, there are signs of imminent corrective actions.

Meanwhile, market analyst Thomas Lee maintains his bullish prediction that the Russell 2000 Index will surge by 50% this year. Lee has consistently held onto this projection since the end of 2023, during a remarkable end-of-year rally. Despite sizable challenges, the Russell may still hit Lee’s ambitious targets.

Famed for his bold specimen, Lee’s projections significantly hinge on actions from the Federal Reserve. He believes that the Russell will prosper as rates decrease, citing the substantial discount of Russell 2000 stocks to those in the S&P 500 and Nasdaq 100, with considerable cash reserves waiting to be injected into the market.

As we approach the end of 2024’s first quarter, the Fed continues to promise rate cuts, albeit without a specified timeline, keeping the key Federal funds rate at 5.25% – 5.5%, a level it arrived at in July 2023.

The S&P 500, Nasdaq Composite, and Nasdaq 100 have all enjoyed growth exceeding 9% this year, while the Dow Jones has increased by 4.7%. Contrastingly, the Russell 2000 has had a more challenging start to the year with gains only reaching 2.52%.

In early 2024, there were rumors of the Fed planning six cuts to the Federal funds rate, reducing it to approximately 4%. Now, only three cuts appear likely, taking the rate to an estimated 4.5% – 4.75%.

Whether Lee’s prediction will reach fruition remains uncertain. However, considering his previous successes, one cannot simply dismiss his forecasts.