January 2, 2024
Good morning,
I hope your holidays were special and that your Happiest New Year is ahead for you.
The stock and bond markets ended 2023 with 9 straight weeks of a rally driven primarily by the Fed’s pivot from a tightening to a neutral bias. The markets have translated the Fed’s mid-December shift into 6-7 rate cuts beginning as soon as March. Since then, several FOMC members have walked back the Fed chair’s comments, asserting that rate cuts aren’t imminent. It’s reasonable to expect the Dec meeting minutes, due out tomorrow, to reinforce their message.
The S&P 500 Index rallied +16% over the last two months to finish the year up +26%. That is quite a rally into a new year where consensus among economists shows a mere +1.3% expansion with a 50% probability of recession. Have markets gotten ahead of themselves? Given the record overbought condition, a correction to start the year is more likely than not.
That said, first corrections following strong rallies are typically not deep or long lasting. Resolving the markets expectations for rate cuts against the Fed’s expectations will probably lead to elevated volatility for the first quarter starting today.
Be well,
Mike
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