The Fed’s ‘dovish pivot’ exhausted at least for the moment, into Expiration. It didn’t help that Friday began with NY Fed-head Williams saying talk of lower interest rates was premature; as he panned ‘Powell’s Pivot Panic’ rally, which was a daily-basis culmination of a 6-week move that began in late October.We didn’t expect much more anyway for now; especially into Triple Expiration; as big stocks were already ahead of themselves, and small-caps struggling of course between buyers looking for 2024 gains and 2023 tax-selling, which for the most part likely concluded weeks ago ‘for’ the better companies investors intended to be positioning for 2024 potential gains (avoiding wash-sale rule).
The ‘dot-plots’ and Chairman Powell’s comments do NOT correlate with the John Williams comments; suggesting they’re not thinking of cutting rates. Silly as rates are already moving down, and Williams was just trying to ‘walk-back’ a bit of exuberance by the market, with respect to the degree of rate cuts.
In other words: rates will basically trend either lower or sideways, with bumps now-and-then; but we’ve seen the peak in rates and rolling recession, softish landing, or however you describe it, we’re believing you won’t see higher rates for the overall cycle; but of course risk assets get more attractive as capital, or I should say the costs of capital, come down. An easing cycle is historically a good sign for the economy and equities, ‘even if’ the initial rate drops actually cause some buyers of items noted (like houses or cars) to wait for ‘even lower rates’, which in a sense would logically follow… later in 2024 and in 2025.
(Reiterating this chart above; as that was key; hedge traders on wrong side.. as well as typo where I meant ‘traders’ not ‘headers’, of course. They still are.)
This first half of December didn’t give much of a pullback before soaring anew for more than the S&P (bolstered by improved breadth). But that’s fine as we got into October’s washout and simply allowed a pause to refresh expecting a higher market anyway.
Certainly we didn’t join the ‘tactical’ specialists, or the most followed chartists, which began the month advising investors to add portfolio hedges. Brace for a pullback in stocks were what most were saying and we said; nope buy dips as this is going higher. But sure, soon the propellants powering this overall rally are not disappearing, but will diminish (even fast after this neutral Expiration); but again not so nasty as ‘the’ leading tactical specialists constantly call for. I am not convinced we won’t have economy sluggishness ‘as’ rates fall early-on when it comes; but I do believe the market’s ‘discounting mechanism’ will help cushion that in a sense.
Market X-Ray: we ‘probably’ get an ‘intermission’ in this extraordinary S&P run-up, with new DJIA highs again today; but a healthy pause may even be ‘why’ NY Fed President Williams tried to dampen the ‘Powell Pivot Panic’, that fueled an S&P near-blow-off for our rally dating from October.
Much of this is improved breadth; relating to our view of most selling being behind us, especially in the smaller stocks that investors wanted to sell and re-enter; so all that has worked ‘for’ the favorable Advance/Declines in most sessions. Key to all this is: rates may go sideways or lower; but even with the inevitable firming here and there; the hiking cycle is over; even if a nominally higher inflation rate follows the initial credit easing (excuse for pause maybe).
If there’s a weekend ‘concern’, it might be domestic terrorism, following what’s been uncovered in Europe, and imans in Michigan recorded calling for jihad. Free speech is not hate speech; those guys should encounter consequences.
I am not convinced we won’t have economy sluggishness ‘as’ rates fall early-on when cuts come; but I do believe the market’s ‘discounting mechanism’ will help cushion that in a sense. You could find the opposite cross-currents early in 2024 as far as S&P vs. broad market are concerned: to wit mega-caps very tired because ‘tax gains’ will be somewhat harvested in a new tax year.
At the same time, small-caps that are struggling to confirm ‘bases’ and get a bit of a bid that holds, will conceivably find less trouble with tax-selling behind as I largely believe it already is; but that varies with prospects seen ahead for a slew of smaller companies. Those without new liquidity needs fare better.
High-yield corporate debt was also attractive as rates topped-out; and that’s a part of the macro picture looking across the valley of any economic soft-spots, and one can debate what will be better (stocks or bonds); or a mixture of both.
Immaculate disinflation . . is what Ray Dalio called it; so I think that’s cute but not exactly what we’re getting; since this is a slowing of the pace of inflation at least now. I don’t think some of worries, about goods higher due to blockage of the Suez Canal routes will last long (U.S. and Coalition Navies will see to that if politicians allow them); or even the Panama Canal alternate passage (which is due to drought that will end with the ‘el Nino’ weather patterns and a shift to Los Angeles/Long Beach ports from some East Coast ports-of-entry (I believe this will also temporarily boost some rail and trucking business).
Bottom line: Whether investors roll-over Money Market Funds into bit stocks sooner is debatable; as history suggest ‘lag’ as rates ease. That’s likely to set-up 2024 First Quarter shuffles; but overall favorable for equities over time. I’m thinking this is particularly favorable to getting the weight off many small-caps.
For the moment we might have subdued volatility, which is amazing as we’re continuing this market higher; and the neutral finish to Expiration shouldn’t be over-weighted in that regard. Much may depend on geopolitics; even what’s in the minds of antagonists in the Middle East this weekend. If there’s any major change, I might reflect via a ‘tweet’ rather than any further Briefing editions.
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