Get ready for the year-end rally

Mid-week market update: The Fed delivered a dovish pause today. In addition, Powell was given opportunities to push back with bearish scenarios, such as raising concerns over the recent risk-on rally as a sign that financial conditions are loosening, or the elevated levels of super-core inflation, but he declined to do so. It is becoming more and more evident that the rate hike cycle is over. The market is looking forward to rate cuts and it’s discounting cuts to begin in March and five quarter-point cuts in 2024.


Here is a framework for thinking about the Fed’s monetary policy.


A soft landing

The Summary of Economic Projections (SEP) is projecting the unemployment rate to rise to 4.1% next year and GDP growth. In other words, a soft landing. The SEP is also projecting a Fed Funds rate of 4.6% in 2024, down from 5.1% in its September. This translates to three rate cuts next year. Moreover, it’s projecting four more rate cuts in 2025, but let’s not get ahead of ourselves.


Treasury Secretary and former Fed Chair Janet Yellen is calling for rate cuts next year in a CNBC interview: “As inflation moves down, it’s in a way natural that interest rates should come down somewhat because real interest rates would otherwise increase, which can tend to tighten financial conditions.” Already, core PCE has undershot the Fed’s year-end target from September.


This is all good news for the markets.


A positive reaction

The market has reacted positively. The S&P 500 has staged an upside breakout of a cup and handle pattern with resistance in the 4600-4630 zone.


Bond prices are also rallying after testing their 10 dma.


What more do you need to know? Get ready for the year-end rally as we approach a period of bullish seasonality. Both my inner investor and my inner trader are bullishly positioned. The usual disclaimers apply to my trading positions.

I would like to add a note about the disclosure of my trading account after discussions with some readers. I disclose the direction of my trading exposure to indicate any potential conflicts. I use leveraged ETFs because the account is a tax-deferred account that does not allow margin trading and my degree of exposure is a relatively small percentage of the account. It emphatically does not represent an endorsement that you should follow my use of these products to trade their own account.  Leverage ETFs have a known decay problem that don’t make the suitable for anything other than short-term trading. You have to determine and be responsible for your own risk tolerance and pain thresholds. Your own mileage will and should vary.



Disclaimer: Long SPXL

2 thoughts on “Get ready for the year-end rally

  1. Interestingly, the usual suspects like MSFT, GOOG, META did not rally at all today. Is there a possibility that there is a changing of the guard? Gold on the other hand together with the mining stocks was the star of the day

    1. The magnificent seven was a safety trade. The rally is now broadening without tech. Value, small and mid caps, gold, fixed income took over the baton from the “safety trade”. One expects and hopes, absurd money policies to be normalized with normal functioning of stock markets to be restored. Free markets need to start working again.

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