All eyes are on the Federal Reserve this week, as investors eagerly await the central bank’s latest move like kids peeking at presents before the big day. With an expected interest rate cut on the horizon, Wall Street is ready to unwrap what should be the next catalyst for a stock market rally.

Treasury bond yields have remained near their lowest points for the year, with the 2-year Treasury yield—a common indicator for the direction of the federal funds rate over the next couple of years—slipping to 3.56%, marking its lowest level in 2024.

This decline in yields has been driven by a mix of factors, including mounting market expectations of upcoming rate cuts by the Federal Reserve, alongside cooling inflation and slower U.S. economic growth.

Given that the S&P 500 has surged nearly 18% so far this year, it’s reasonable to expect bouts of volatility amid the seasonally weaker months of September and October, along with the bitterly fought U.S. elections on November 5.

As the two assassination attempts against GOP candidate Donald Trump attest, this election year is particularly turbulent, with the prospect of violence always looming. Investors are getting whiplashed by a daily dose of dire headlines. Historically, however, markets have tended to rebound during the final two months of election years.

As always, I advise a level-headed approach. The long-term outlook remains bullish, although we’re likely to see choppy trading along the way.

During the third quarter, which kicked off June 30, the S&P 500 has risen about 3%. Leadership in the stock market has been shifting, with cyclical plays, such as industrials, gaining traction.

Accordingly, the Dow Jones Industrial Average hovers near all-time highs and has shot past its 20-, 50- and 200-day moving averages (see chart, with data as of market close Tuesday).

Moving averages help investors observe the direction of the trend (upward, downward, or sideways). When a stock’s price is above the moving average, it’s typically seen as a bullish sign, and when it’s below, it’s often considered bearish. Shorter moving averages are used for short-term trading, while longer-term moving averages are better suited for long-term investors.

Rate-sensitive sectors have benefited from the market’s anticipation of monetary loosening by the Fed, at the conclusion of its September 17-18 meeting.

Looking ahead, I believe this broadening of market leadership will continue into 2025. I advise diversifying your portfolio by complementing growth and artificial intelligence (AI) investments with value and cyclical stocks, as well as small-cap U.S. equities.

Markets also are eager for insights from Fed Chair Jerome Powell during his customary post-meeting press conference Wednesday.

Alongside the rate announcement, the Fed will release updated economic projections and a revised “dot plot”—a visual depiction of where Fed members believe interest rates are headed.

The market is keen to see how many rate cuts the Fed expects for the remainder of 2024 and into 2025, as well as where rates might settle in the long term. Powell’s remarks, coupled with the dot plot, will provide important clues.

In the June meeting, the Fed forecasted a single rate cut for 2024, followed by four more in 2025, with another four in 2026, ultimately bringing the fed funds rate to around 3.1%.

Wall Street expects the Fed to lower rates by 0.25% this week, although a 0.50% reduction remains a possibility. It’s likely we’ll see two more rate cuts later in 2024.

The Fed appears to be shifting its attention away from inflation, which has eased in recent months, toward concerns about a slowing labor market.

Powell recently remarked that the Fed does not seek further deterioration in labor market conditions, signaling that the central bank may be willing to take aggressive action to prevent further economic weakness.

As Wall Street awaits the Fed’s decision, the main U.S. stock market indices closed mostly higher Tuesday, with the Dow taking a slight breather and the S&P 500 notching another record close:

• DJIA: -0.04%
• S&P 500: +0.03%
• NASDAQ: +0.20%
• Russell 2000: +0.74%

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John Persinos is the editorial director of Investing Daily. You can reach John via mailbag@investingdaily.com

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