Santa Rally Turns Sleigh Swerve? Economic Jitters Threaten High-Flying Market

The Federal Reserve is getting closer to its target of getting inflation back to 2%, according to inflation figures released on Friday. This puts the central bank on the path to lowering interest rates.

Still a Few Signs of Recession

There are still very few signs of recession. After reaching almost ten-year highs in fall, interest rates have now eased. The Dow Jones Industrial Average (^DJI) and S&P 500 (^GSPC) are on the doorstep of record highs. And the Nasdaq Composite (^IXIC) is up over 40% this year.

Amidst a light economic calendar and an empty slate of results, the biggest drama for investors this week should be whether the stock market's climb will result in a record for the S&P 500 (the Dow achieved a record last week).

The most important economic developments on the calendar will be a report on initial unemployment claims on Thursday and data on house prices on Tuesday morning. Big businesses aren't anticipated to release their results.

Inflation figures released on Friday demonstrated that the Fed was making progress toward its goal of 2% inflation.

The Fed's favored inflation indicator, the Personal Consumption Expenditures Price Index, shows that prices in November increased 3.2% over the previous year on a "core" basis-a measure that omits food and energy. Since April 2021, this yearly rise has been the slowest.

However, closer examination of this data shows the central bank has essentially accomplished its objective.

Skepticism Rises

Despite some efforts by Federal Reserve (Fed) officials to counter market expectations for interest rate hikes, Andrew Hunter, deputy chief US economist at Capital Economics, expressed skepticism. Hunter noted that the core PCE inflation rate has remained below 2% over the past six months, indicating that the recent attempts to adopt a more hawkish stance by some Fed officials are unlikely to be convincing.
According to Hunter, there is growing evidence suggesting that the inflation concerns following the pandemic have subsided, and he anticipates a significant cut in interest rates in the coming year.

The market's 2023 surge has been partially fueled by expectations that the Fed would act swiftly to lower interest rates in 2019.

The second half of this year has been all about rates, even if many investors will remember it for the AI-related excitement that sparked the tech trade after a dismal 2022.

As concerns about diminishing inflation pressures and, therefore, uncertainties about the easing of Fed policy from 22-year highs, impacted on markets, there was a fall in the US stock market in the fall of 2015. At the same time, Treasury rates surged to 16-year highs.

Numerous worries were allayed by recent statistics and expectations from the Fed.

By 2023, when the stock market has pushed toward all-time highs, projections for 2024 have already become antiquated.
The Goldman Sachs equities strategy team raised its price prediction for the S&P 500 in 2024 from 4,700 to 5,100 last week.

The market wasn't yet persuaded about the direction that inflation, the economy, and the Fed would go when many on Wall Street started releasing their year-ahead projections in mid-November.