Strategists say the Fed needs to "kill the zombie" through a high-interest-rate-induced recession before investors should go out and buy more stocks

• Investors need to wait out the recession and the ensuing interest rate cuts before putting more cash into equities, says Canaccord's Tony Dwyer.
• He described the U.S. economy as a "corpse" that needs to be "killed" before it starts to recover.
• In this case, Dwyer said, the Fed would keep rates higher for longer to induce a downturn before cutting them.

Tony Dwyer, Canaccord Genuity's premier market strategist, says the Fed needs to stifle the half-dead U.S. economy by extending interest rates to induce a recession - only then should investors put more cash in the market.

In an interview with CNBC on Thursday, Dwyer pointed out that the economy is flashing signs of weakness, and some forecasters have warned that a recession could be just around the corner. Dwyer said this is actually good news for investors, because a recession is exactly what investors need to wait for the opportunity to buy:

"You need to kill the zombies. A zombie economy is one where the economy is slowing down enough to go into a recession because the yield curve is inverted and interest rates are rising, and you're waiting [for a recession]," he said." If you have lower inflation, lower interest rates, and you start worrying about rising unemployment, that sets the stage for a real early-cycle relapse.

Federal Reserve officials have raised interest rates by 525 basis points in an effort to reduce inflation, which threatens to overstretch the economy into a recession.

A series of weak data suggests that the economy is slowing down. For example, while February's unemployment rate is still near record lows, part of the reason is that the Labor Statistics Department saw a business turnover rate of just 27% in its last employment report, suggesting that hiring conditions are weaker than they look on paper, Dwyer said.

Corporate earnings also look to be struggling, Dwyer said, as much of the 2023 earnings growth is attributable to the "Magnificent Seven," a group of mega-cap tech stocks that have surged in Wall Street's enthusiasm for artificial intelligence. Excluding those seven stocks, earnings growth in 2023 is negative, and is estimated to be negative this quarter as well, he said, citing data from the London Stock Exchange.

While the stock market has hit a series of record highs this year, not all parts of the market have performed well. For example, small cap stocks have not fared as well as the S&P 500, and the Russell 2000 is only up 5.5% from the beginning of the year.

A slowing economy could prompt the Fed to cut interest rates - a monetary easing tool that investors have been eagerly awaiting. According to the CME FedWatch tool, the market generally expects the Fed to cut rates by 75 basis points or more this year.

"At this point, where you're overbought and extremely upside, you just want to wait for a better opportunity, and it seems to us that if the worsening employment numbers cause rates to go down, you're worried about the economy, and that's when I want to get in," Dwyer added.

Some Wall Street forecasters have warned that interest rates could remain high for a long time as the Fed seeks to avoid an inflationary spiral. But Dwyer warned that this could only lead to a more severe recession, as economic growth is already slowing.

Although a growing number of economists are optimistic about the prospects for a soft landing for the economy, the U.S. could still fall into recession next year. An economic indicator called the "full model" shows that the odds of a recession in the next 12 months are 85%, the highest since the Great Financial Crisis. The New York Fed, on the other hand, forecasts a 58% chance of recession by next February.

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