Full Video Transcript Below:

CAROLINE WOODS: Joining me now, Sam Stovall, chief investment strategist at CFRA. Sam, always good to have you. Thanks so much for joining us on Fed day.

SAM STOVALL: Happy to be here Caroline.

CAROLINE WOODS:So Sam, the Fed just cut interest rates for the first time this year. It was widely expected. But what’s your takeaway?

SAM STOVALL:Well, my takeaway is that they’re doing pretty much what the Street had been anticipating, that they cut by 25% basis points and signaled that there’s a possibility of two more cuts by the end of this year. So deciding that they will remain data dependent. But they are leaning toward the dovish side. So two more on the way. According to the plot, potentially 1 in 2026 was, which was a bit more conservative than some were expecting.

CAROLINE WOODS:Is the Fed cutting because they can or because they have to, Sam?

SAM STOVALL:Well, I think certainly they can. But at the same time, I think that they believe that they have to, even though inflation is remaining stickier than they would like, and it’s going to take longer for them to reach their target of 2% on core year on year PCE. I think the real challenge is the labor markets, and as a result, they decided that they needed to cut now to try to help spur activity in that labor area.

CAROLINE WOODS:We know that stocks can be volatile on Fed day, but as we take a look at the market reaction right now, stocks are mixed. Not doing a whole lot though. S&P and NASDAQ are lower. Dow and Russell are higher but already off the highs. So talk to me about what the market reaction actually tells you. Does that mean this was all just priced in?

SAM STOVALL:Well it’s not fully priced in because we are seeing small caps do quite nicely. And as a result, I think it’s an encouragement that those people who have held on to the mid and small cap indexes probably will get rewarded. Both are trading at greater than 30% discounts to their 20 year average relative PE ratios, and they’ve been in a start and stop situation for a while. So now possibly they have hit the Start button and that will remain on.

CAROLINE WOODS:So what is the investing playbook now that the Fed is in rate cutting mode?

SAM STOVALL:Well, history would tell us that in a second year of a rate cutting mode, the market continues to do quite well. We find that all sizes, all styles, all sectors except utilities have posted average increases led by financials and information technology, with utilities being the only decliner on average. And of the 75 industries that have been around for at least three rate cycles since 1990, we find that 84% of them posted gains in that second year. So basically, second year of cuts with us not falling into recession tends to point to higher prices ahead.

CAROLINE WOODS:So if you take a look at the best performing sectors. So far this year, it’s things like tech industrials, financials. So basically more of the same Sam. Or should investors be making some changes to their portfolios right now?

SAM STOVALL:I don’t really think they should be making a lot of changes. Studies actually have shown that you’re better off letting your winners ride, rather than trying to pick the bottom, because they have an awful lot of overhead resistance that they have to work through before they can do quite well. We’ve seen some rumblings of action in health care and in materials, but on a cap weighted basis and over a longer time frame, they’re still just bouncing along the relative strength bottom. So I would say monitor health care. You can make some selected picks. Our Lowry technical Analysis Group highlighted Merck as well as Medtronic’s just a couple of days ago, indicating that they are making some positive moves, but they themselves don’t represent the entire sector.

CAROLINE WOODS:OK, speaking of winners riding, we’ve seen this really impressive move higher in gold. Sam it’s actually lower today on the heels of the Fed decision. But do you think that will be a winner that will continue to ride well over the coming year?

SAM STOVALL:I would say Yes, but I think because of the amount that it has risen so far already, it might be due for some sort of digestion of gains, or at least to pause, a correction in time. But we do think that a year from now, we could be seeing gold prices above $4,000 an ounce. So still, there is some upside potential.

CAROLINE WOODS:So Sam, we have the Fed cutting rates, which is what the market wanted. We have potentially some good news on the horizon from the US and China in terms of trade. Seems like TikTok deal points to good news. Then there’s these reports about Nvidia that could be bad news, but ultimately that doesn’t seem like maybe it could be as big of a headwind as we had feared. So at this point, what is the biggest risk to the market right now?

SAM STOVALL:Well, there’s the biggest risk is always the threat of recession. We are not anticipating recession anytime soon. But I like to say that bull markets don’t die of old age. They die of fright. And what they are most afraid of is recession. If we end up with a bear market simply in anticipation of recession. Usually we’re down about 28% but a bear market associated with the recession is down typically 35% Obviously, Paul Samuelson once said that the stock market has anticipated nine of the last five recessions. So you got to make sure that if you’re looking to bail out on some winning stocks, it’s because you have a very good belief that we are headed for a recession.

CAROLINE WOODS:And just to clarify, that’s not your forecast. You think this is a market that’s at least going higher into year end?

SAM STOVALL:Yes I do. When you look to the indicators that the NBER National Bureau of Economic Research looks at when deciding a recession, we don’t see any of them being in negative territory for an extended period of time.

CAROLINE WOODS:Sam Stovall, CFRA. We’ll leave it there. Thanks so much.