There are poems written throughout history that depict the hours before the Christmas holiday being still and quiet. But that’s nothing compared to a couple days after the market holiday — with all the gifts opened and all the wrapping in the trash, but prior to the credit card payments coming due — we’re in a particularly calm time on our calendars. (Unless your home is still hosting guests, in which case you’re longing for a little quiet time.)
This goes double for market days where we have no economic nor earnings reports on deck. We’re clear this Hump Day. With the major holiday season behind us but Jobs Week just ahead, we can call this the “quiet before the storm.” Or at least a time to pause and reflect on where we’ve gotten to, and where we’re headed.
Where we came from is no mystery: 2023 was an incredible comeback story from a lousy 2022. With the help of the A.I. technology narrative that took off this past spring/summer, the Nasdaq zoomed ahead +44% year to date — with the top Nasdaq 100 up a terrific +56%. The only year in recent history comparable to such success was 2009 — the year the market began digging out of the Great Recession — which returned +53.5%. Should the Nasdaq remain flat for the next three sessions, it will be the best U.S. sub-index performance in the 21st century so far.
More recently, the small-cap Russell 2000 has gotten into the game, as well. In fact, as we mentioned yesterday, over the past six months, the Russell is outperforming the other major indices — and all these gains have been realized in just the past two months. We can trace this success to the Fed’s new dot-plot on interest rates: not only with the dropping of a late-2023 rate hike of another 25 basis points (bps), but with the forecast of 75 bps coming off the current Fed funds rate by this time next year.
The paradox here is that market participants see that as very good news, and they have bid up the market as a result. However, bullishness in the market and particular economic structures will not trigger a cut from the Fed. Basically, until we see current rate levels squeeze inflation out of the market in prints like CPI and PCE, the current 5.25-5.50% level will remain. In fact, these three rate cuts don’t look to really take hold until about mid-2024, based on today’s estimates.
Where markets may be overthinking things a bit has to do with 2024 being an election year: the Fed, as always, interested in keeping itself an apolitical entity, is not likely to cut rates — once or multiple times — in the latter half of the year ahead of Election Day on November 5. Thus, the thinking is that the three rate cuts predicted next year will necessarily begin prior to June, which short-hand now seems to mean “March.” But if economic strength is still the narrative, the Fed is highly unlikely to make any such moves.
Will this cause disappointment among market participants — particularly those in the strongly bullish camp here at the end of 2023? It’s certainly possible. Does this mean we may not see three interest rate reductions next year, which may keep the Fed funds rate still at or above 5%? This is possible, too. After all, just because the Fed puts together a dot-plot doesn’t mean they’re obligated to hold firm to it; look at Q423 — we were supposed to have gotten another rate hike by now, and it hasn’t happened.
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Market Success and Challenges Ahead
There are poems written throughout history that depict the hours before the Christmas holiday being still and quiet. But that’s nothing compared to a couple days after the market holiday — with all the gifts opened and all the wrapping in the trash, but prior to the credit card payments coming due — we’re in a particularly calm time on our calendars. (Unless your home is still hosting guests, in which case you’re longing for a little quiet time.)
This goes double for market days where we have no economic nor earnings reports on deck. We’re clear this Hump Day. With the major holiday season behind us but Jobs Week just ahead, we can call this the “quiet before the storm.” Or at least a time to pause and reflect on where we’ve gotten to, and where we’re headed.
Where we came from is no mystery: 2023 was an incredible comeback story from a lousy 2022. With the help of the A.I. technology narrative that took off this past spring/summer, the Nasdaq zoomed ahead +44% year to date — with the top Nasdaq 100 up a terrific +56%. The only year in recent history comparable to such success was 2009 — the year the market began digging out of the Great Recession — which returned +53.5%. Should the Nasdaq remain flat for the next three sessions, it will be the best U.S. sub-index performance in the 21st century so far.
More recently, the small-cap Russell 2000 has gotten into the game, as well. In fact, as we mentioned yesterday, over the past six months, the Russell is outperforming the other major indices — and all these gains have been realized in just the past two months. We can trace this success to the Fed’s new dot-plot on interest rates: not only with the dropping of a late-2023 rate hike of another 25 basis points (bps), but with the forecast of 75 bps coming off the current Fed funds rate by this time next year.
The paradox here is that market participants see that as very good news, and they have bid up the market as a result. However, bullishness in the market and particular economic structures will not trigger a cut from the Fed. Basically, until we see current rate levels squeeze inflation out of the market in prints like CPI and PCE, the current 5.25-5.50% level will remain. In fact, these three rate cuts don’t look to really take hold until about mid-2024, based on today’s estimates.
Where markets may be overthinking things a bit has to do with 2024 being an election year: the Fed, as always, interested in keeping itself an apolitical entity, is not likely to cut rates — once or multiple times — in the latter half of the year ahead of Election Day on November 5. Thus, the thinking is that the three rate cuts predicted next year will necessarily begin prior to June, which short-hand now seems to mean “March.” But if economic strength is still the narrative, the Fed is highly unlikely to make any such moves.
Will this cause disappointment among market participants — particularly those in the strongly bullish camp here at the end of 2023? It’s certainly possible. Does this mean we may not see three interest rate reductions next year, which may keep the Fed funds rate still at or above 5%? This is possible, too. After all, just because the Fed puts together a dot-plot doesn’t mean they’re obligated to hold firm to it; look at Q423 — we were supposed to have gotten another rate hike by now, and it hasn’t happened.