Ever since the Fed meeting on 11/1, stocks have been on a tremendous bull run. That’s because investors got just enough acknowledgement from Chairman Powell that they are winning their battle over high inflation without a recession forming.

So now is a good time to look at where we stand coming into the next Fed meeting on 12/13 and what that means for the market going forward.

Market Commentary

The main positive development since the last Fed meeting in early November has been the tremendous drop in long term bond rates. The chart below for the 10 year Treasury rate shows you the dramatic rise that initially cratered stocks followed by the welcome relaxation in rates and bull rally for stocks that ensued.

This was not just a US centered issue. Other key rates in Europe and Asia saw beneficial declines that improved the economic outlook for 2024 as lower rates helps fuel investment in future growth.

Also since that 11/1 Fed meeting we have seen the US economy properly simmer down from the too hot 5% GDP growth pace from Q3. The Goldilocks level for GDP growth is 1-2% as it keeps us safely above recessionary territory while also reducing inflationary pressures.

Right now, the famed GDPNow model from the Atlanta Fed is coming in at +1.2% growth for Q4. This pretty well matches the outlook for the Blue Chip Consensus view which is the average view of leading economists. This is

Next it is good to look at the employment picture because without that faltering...then its impossible to be worried about a recession. On the other hand, you don’t want the job market so hot that it stokes sticky wage inflation.

Thus, it was interesting to see that the JOLTs report on Tuesday fell from a high of over 11 million job postings earlier in the year to a recent low of 8.73 million. In the grand scheme of things, that is still a lot of job openings and says the employment market is still quite healthy. But it is no longer boiling hot which should subdue inflationary pressures in wages going forward.

Overall inflation has also continued to ebb lower since the last Fed meeting. This was apparent in the continued reduction in the November CPI report. Even better was how the forward looking PPI report showed an reduction in month over month inflation that says that future CPI readings will continue to be lower.

Add all of this up and you understand why right now odds are placed at 97.3% likelihood of the Fed NOT raising rates at their next meeting on 12/13. Interestingly some investors are starting to believe that as early as January is when the Fed will start lowering rates. That stands at 16% likelihood up from 0% just a month ago.

The rate cut parade keeps picking up steam from there with 61% expecting a cut at the March 20, 2024 meeting and all the way up to 88% at the May 1, 2024 event.

Yes, one could look at that and say it doesn’t match the hawkish resolve stated by Chairman Powell and other Fed officials. And thus could set up the market for some disappointment if these rate cuts are not delivered as early as expected.

That is always possible. However, to date the market as a whole has done a pretty good job of prognosticating the Fed’s next move. Given that rates are currently restrictive and inflation is coming down to trend pretty fast, with little obvious reason seeing why they would spike higher from here...that would point to the Fed being wise to start lowering rates early in 2024...even if very slowly at first.

Long story short, we are in a bull market til proven otherwise. And the future lowering of rates would be yet another catalyst for a move higher.

The key is determining which stocks are likely to outperform when so many of them already had tremendous runs in 2024. I believe the recent rotation towards small and mid caps is a precursor of the major trend in 2024.

Meaning what worked in 2023 is done. It is time for smaller, growthier and more reasonably priced stocks to shine. And we are certainly leaning into those trends in our portfolio.

More on that in the section below...

What To Do Next?

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Wishing you a world of investment success!

Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Editor, Reitmeister Total Return

SPY shares were trading at $458.17 per share on Friday morning, down $0.06 (-0.01%). Year-to-date, SPY has gained 21.13%, versus a % rise in the benchmark S&P 500 index during the same period.

Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.

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