December 4, 2023
Good morning,
Much of the recent rally can be attributed to the belief by investors that inflation is moderating with interest rates coming down in anticipation of Fed rate cuts. And by rate cuts, the market means a cut in February and over 100 bps of cuts next year. Juxtaposing this outlook against the one entering November, and you see why November saved every money manager’s year – it has been a 180-degree change.
Are the stock and bond moves over the past four weeks too much, too soon? Probably, but the direction of the moves seems justified for the end of a Fed tightening cycle. It would seem that both the stock and bond markets have moved to levels where the risk of a pullback is high. In the past ~100yrs, December’s following November’s that were up over 5% have an average return of almost +0.5% with a tight range (Bloomberg Data). Of course, that data includes the traditional Santa Claus rallies. So, a pullback ahead of Santa’s arrival foots with the historical record.
The big event for markets this week is Friday’s November employment data. And while that’s a long way away, payroll Friday does stands out as the obvious point where risks of a snap-back in bond yields are higher. When you look at what’s priced for the Fed next year (above), it feels like it will be easier to take away 50 bps of cuts than to add another 50 bps in.
Be well,
Mike
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