[Chart courtesy of MarketWatch.com]

1. Moving the markets 

The market kept up its winning streak today, with the S&P and Nasdaq scoring big while the Dow barely budged.

The S&P 500 has been on a roll for seven weeks, its longest run since 2017. The index is up more than 3% this month. The Dow and the Nasdaq are also up by more than 3% and 4%, respectively.

The mood improved last week when the Fed hinted at three rate cuts in 2024, saying inflation was cooling off. Treasury yields fell, with the 10-year yield dropping below 4%. Or maybe the Fed just gave in to inflation and got a reminder that 2024 is an election year.

But the market may not have it so easy in the coming weeks. Stocks are pricey and earnings may suffer. The bulls and the bears may fight for control, and it’s not clear who will win.

Traders also got a reality check from the Fed’s Goolsbee, who said the market was too optimistic about the rate cuts. He said the market jumped to the conclusion that the Fed would normalize quickly, but he didn’t see that happening.

That scared the bond market, as yields rose but didn’t reach 4%. A short squeeze fizzled, but the “Magnificent 7 stocks” hit a new high. Apple went down, facing trouble with China and the US over its products. The dollar was steady, gold gained a bit, and oil spiked but retreated.

The S&P’s seasonality chart still looks bullish, but will that last beyond mid-January?

[Chart courtesy of MarketWatch.com]

1. Moving the markets 

The stock market ended higher today, with the 10-year Treasury yield plunging to 3.92%, its lowest level since August. Investors were cheered by a surprise increase in retail sales, which suggested that the economy would avoid a hard landing in 2024.

The bond market seemed to give an assist, as traders priced in more rate cuts for 2034. The Fed signaled that it may lower rates three times next year, after saying just two weeks ago that it was “premature” to talk about easing. What changed in such a short time?

Meanwhile, bank stocks rallied, even as the Fed’s emergency lending facility hit a record high of $124 billion. The Regional Banking ETF soared to levels not seen since the March banking crisis. How does that make sense?

To me, the Fed has given up on fighting inflation, which is likely to get worse as the government keeps borrowing and spending like there’s no tomorrow. The latest data showed that the November budget deficit was a staggering $380 billion, the largest ever for that month, despite a 9% rise in tax revenues.

This fiscal recklessness is happening at a time when interest rates are rising sharply. This is bad news for a government that relies on debt to fund its operations and is probably one of the reasons why the Fed has capitulated to inflation. The government can’t afford high interest rates.

Financial analyst Jim Grant believes that we are in the early stages of a long-term bear market in bonds (higher yields) that will last for decades, regardless of what the Fed does. This means that the only way to escape this vicious cycle is to slash spending.

But will that ever happen?

[Chart courtesy of MarketWatch.com]

1. Moving the markets 

The Fed gave the markets a big gift by signaling that it will slash rates more than expected next year. The central bank kept the key interest rate unchanged for now, but projected three cuts in 2024, as inflation has cooled down from its recent highs.

This was music to the ears of investors, who have been eagerly waiting for the Fed to ease its monetary policy and boost the economy. The Santa Claus rally may not be over yet.

The Dow, which had suffered its worst year since 2008 due to the Fed’s hawkish stance, soared to a new record high after the announcement. The blue-chip index has outperformed the S&P 500 and Nasdaq in the past month, as hopes of lower rates increased.

The Fed’s dovish turn was also supported by the latest inflation data, which showed that both producer and consumer prices were flat or slowing in November. This eased the fears of runaway inflation that had spooked the markets earlier this year.

However, not everything was rosy in the financial world. Bond yields plunged, as investors rushed to buy safer assets, pushing the 2-year yield down by the most since the banking crisis in March. The 10-year yield found support at 4%.

The stock market rally was also driven by a massive short squeeze, as traders who had bet against the market had to cover their losses.

But the so-called “Magnificent 7 stocks” – the tech giants that had led the market for years – did not join the party.

The dollar took a dive, as lower rates make the greenback less attractive. Oil prices bounced back above $69, as lower rates could boost demand. But the star of the day was gold, which surged 2.3% and beat the major indexes by a wide margin.

The Fed’s sudden change of course on rate cuts in 2024 raises a curious question: “Did someone remind Powell that 2024 is an election year?”