Santa Rally?

Last month, our commentary focused on how pessimistic outlooks had missed some of the positives in the economy and market.  What followed was a manic rise in the markets in the month of November.

November and December are historically strong months.  Sometimes dubbed “the Santa rally”, we tend to see stocks drift higher into the end of the year.  This is not always the case, but with some big technical reversals in the markets in the last 2 months, odds favor a rally into the new year.

One important reversal to be aware of is in the 10-year Treasury Bond.  Considered a benchmark for prevailing rates, the 10-year yield started the month at over 4.9% and ended the month close to 4.3%.  That is a big decline in interest rates in a very short time!

While some of the data supports the decline in interest rates, the size of the decline is probably better described by the market's persistence on the Federal Reserve to cut interest rates in 2024, and cut them significantly!  This is a reasonable assumption if we were to remove politics and sentiment from the equation; but when have politics and sentiment not been a factor!?!?  The more likely outcome is that the Federal Reserve will cut rates later than they should, just like they resisted raising rates until inflation had taken a strong hold.  It is likely that they will need to see either inflation below their 2% target or a significant change in the labor market and GDP growth to budge from their current interest rate target.  While they may be late to cut, it also seems that the chances of another hike are remote.

“Be curious, not judgemental.” – Ted Lasso

While predicting interest rates can be fun and make for good cocktail conversation, we encourage investors to spend more time being observant.  With such incredible outperformance of the top 7 largest technology stocks this year, it begs the question if that fantastic run can continue.  January will be an interesting month to watch, and will likely indicate if there is going to be leadership change.  Will the other 493 stocks in the S&P 500 catch up?  The first month of 2024 will give a strong hint of whether or not that will be the case as institutional investors will certainly be making positioning changes.  No need to guess or predict what they will do, as their ships turn slow.  We will get a glimpse in January where they want to steer the boat, and our more nimble schooners can change course and pull ahead.

But enough of all this market talk and worry about the year to come.  Tis the season!