November finished up as the best-performing month of the year so far for the S&P 500 and the best since July 2022. Friday’s additional gains almost across the board suggest that investors are in a VERY bullish mood and anticipating a December rally. When I look at the direction of the markets and the underlying factors driving it, I see a rally that has moved too far, too fast and is in the dangerous position of reversing course at any time.
I think the market has probably overdone it on the idea that the Fed is going to begin cutting interest rates very soon. The 10-year Treasury yield has dropped by 80 basis points in just a little over 5 weeks. That’s a tremendously sharp change in expectations based on one inflation report and a Fed pause over such a short period of time. The Fed Funds futures market is pricing in a 65% chance of a rate cut at the March 2024 meeting and a 77% chance of at least FIVE quarter-point cuts by the end of 2024. Powell is trying to control the narrative by saying that rate hikes are still a possibility, but the markets are pricing in a lot of optimism that the Fed is going to hit the gas on loosening monetary policy when the core inflation rate is still at 4%. With that much bullishness, any kind of disappointing news or number could ignite a sharp reversal. If I’m right, that reversal could very well come in December when investors are least expecting it.
