The Selloff Is Over, Here Comes the “Santa Rally”

The market’s pulse quickened today as stocks ascended, buoyed by hopes that the Federal Reserve is done raising rates.

The Nasdaq took the lead, surging over 1.1%, while the S&P 500 and the Dow Jones Industrial Average weren’t far behind, posting gains of about 1% and 0.9%, respectively. This uptick follows a robust performance yesterday, after the Fed’s decision to maintain rates sparked optimism among traders, suggesting a pause in rate adjustments come December.

Fed Chair Jerome Powell hinted that any future rate hikes would hinge on the persistence of current financial conditions and the belief in their stability. He emphasized that the Fed is not on the lookout for volatility, which he categorizes as noise rather than a signal, indicating a steady hand at the wheel.

Powell also detached the recent yield spikes from expectations of the Fed’s actions, pointing out that the surge in the 10-year Treasury notes to levels unseen since 2007 and the uptick in 30-year mortgage rates towards 8% were not in anticipation of the central bank’s moves. This detachment suggests that the Fed may not feel pressured to act precipitously in response to market fluctuations.

The Fed Chair’s remarks further downplayed the influence of anticipated policy moves on long-term rates, suggesting that the recent uptick in these rates might not revert even if the Fed’s policy stance softened.

Echoing this sentiment, Rick Rieder of BlackRock observed that the Fed remains committed to combating inflation, yet signals from the latest statement and press conference indicate that the rate-hike cycle may have reached its terminus.

Investor expectations have adjusted accordingly, with the odds heavily favoring the Fed’s inaction for the remainder of the year, as reflected in the CME Group’s FedWatch tool. The market now only sees an 11% chance of a hike in December, down significantly from 41% earlier in the week. This shift in market sentiment underscores a confidence that the Fed, under Powell’s leadership, will not be easily swayed by market rallies or sell-offs.

As the earnings season unfolds, all eyes are on Apple’s post-market earnings report, with investors eager to gauge the health of iPhone sales in China and global consumer spending, following a series of mixed reports from other Big Tech players.

In the meantime, Starbucks has already delivered a jolt to the market with earnings surpassing expectations, and Shopify’s shares soared on the back of a profitable quarter, bolstered by its adoption of AI.

Overall, though, the coast seems to be clear for bulls now that a December hike is out of the picture. The seasonals support a rally, too.

The median return for the Nasdaq Composite during November has been +3.86% going
back to 1985 when the index was formed. The Nasdaq closed higher in 10 out of the last 11 Novembers. The S&P did as well, and the median return for the index during November is +1.50% going back to 1928.

All in all, this bodes well for patient bulls who were forced to watch as the S&P fall over the last three months, as yield-driven anxiety finally subsides, putting Treasurys back in the driver’s seat like they were for much of the last two years.


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