US equities are trading near record highs after the Federal Reserve cut interest rates last week, but a long-time chartmaster doesn’t believe the euphoria is warranted.
Immediately after the Fed meeting, the S&P 500 spiked before giving up its gains. But the next day, the index soared nearly 2% to an all-time high of more than 5,700.
That sudden surge probably isn’t sustainable, said David Keller, the president and strategy chief at Sierra Alpha Research, in a recent interview with Business Insider.
“I’m super skeptical about strong further upside from what we’ve experienced so far,” Keller told BI. He added that this move may signal that “the economy is slowing down so much that the Fed feels they need to aggressively start to cut rates.”
Why caution is warranted — unless stocks sink to a key buying threshold
Keller’s concerns about the market aren’t new. The technical-minded strategist, formerly of StockCharts.com, warned of a pullback back in January, and again in April and July.
But although stocks have had a few rough patches, the path of least resistance has still been higher. The S&P 500’s 19.4% year-to-date gain would be its sixth double-digit gain since 2017.
After suspecting that the market was near a peak in early September, Keller thought the most likely outcome after the Fed’s decision would be a mild sell-off. He has since recalculated and now expects stocks to stall, dragged down by the growth stocks that led much of this rally.
The Invesco QQQ Trust (QQQ), a popular ETF synonymous with mega-cap tech companies, will likely be flat or down in the next six to eight weeks, Keller said. September has historically been a weak month of the year in markets, Keller noted, and lows often come in October.
In an election year, that uncertainty is heightened. Add in an unclear path forward for interest rates and geopolitical risks, and Keller said stocks will struggle to break past today’s levels.
But once the election is over, Keller expects hope to abound — no matter who’s elected.
“There’s usually a lot of optimism,” Keller said. “Whoever’s getting elected tries to be very encouraging about upside potential for economic growth. And so, as a result, usually we see a pretty good, strong November and December.”
If US stocks slump substantially heading into the final two months of the year, Keller thinks it could be wise to buy. And if the S&P 500 slides below the 5,200 mark, which was last seen at the early-August lows, Keller would be waving the green flag.
“If we would get a pullback down to that sort of level, I think it would most likely set up one of the great buying opportunities of the year — if not a multi-year period,” Keller said. “Because weakness to that degree means these stocks that have shown so much strength, have had enough of a drawdown that they really could set up for a next big move higher.”
7 top places to invest now
While Keller can’t pinpoint exactly what will happen next for US stocks, he can say with confidence that passive investing won’t be a sound strategy in the near term.
“The days of just being able to park your money in an index fund and watch it grow is probably not the play now,” Keller said. “It’s more opportunistic in looking for areas of the market that are going to do well.”
Many in markets believe that a Donald Trump victory would be bullish, since the Republican is an advocate for lower taxes, Keller noted.
However, the strategist added that a Kamala Harris presidency could be beneficial for stocks in certain sectors and industries, like renewable energy. He cited solar-energy companies like Enphase Energy (ENPH) and First Solar (FSLR) as potential winners from this trend.
“These are stocks that have not performed particularly well through the course of 2024, but now show renewed strength,” Keller said.
Investors may be looking for ideas that could succeed under Trump or Harris. Homebuilders such as DR Horton (DHI) can be a prime beneficiary of lower interest rates, Keller pointed out.
“Rates are coming down,” Keller said. “And when you think about what that means, that usually means: really good setup for homebuilders. Because buying a house is just going to become less expensive, most likely, here in the six to 12 months to come.”
Another group that will enjoy lower rates and a normalizing yield curve are financials, specifically money-center banks, Keller said — even though these parts of the market have gone under the radar.
Keller’s other investing ideas should offer a hedge against heightened volatility. He likes gold stocks, as does leading fund manager Jeff Muhlenkamp, since they’re rallying and have a low correlation with other equities. Utilities also stand out, not only due to their defensive qualities, but because their yields look more attractive as falling interest rates weigh on bond yields.
