Nothing that happened last week derailed the current bullish market sentiment. The decline in core PCE, the Fed’s preferred inflation measure, should help confirm the notion that the Fed will likely commence with rate cuts in the first half of the year. Core PCE hit its lowest mark since early 2021 and will probably come pretty close to the Fed’s 2% target by the middle of the year as high base effects roll off of the calculation. Should the Fed be declaring victory on inflation? They’ve certainly made a lot of progress on that front over the past year, but starting a rate cutting cycle with core inflation running at a 4% annualized rate is a risky venture. There are some lagged effects of the Fed’s hiking cycle that still have yet to show up and that probably helps keep inflation contained in the near-term, but don’t be surprised if we start talking about inflation again in the 2nd half of the year.
Small-caps had yet another big week and appear to be in the midst of the breakout that would be a significant mile marker for this rally. If you recall, I’ve noted over the past several weeks that “small-caps are the key” because they had yet to break out in the way that large-caps had on their way to new all-time highs. With small-caps forming a triple top over the past year and a half, there was a possibility that they could get rejected at that point again and indicate that the equity rally was running out of gas. So far, however, small-caps have broken through that top and are holding on to gains. They’re currently sitting at about 2% above that level and, if it can be sustained, would suggest that there may be further upside here.
