December twenty-third, two thousand twenty-four
I. Foundation
resistance to change and hence greater dependability for the results shown in the past.
II. Insights
Our Viewpoints and ideas on market.
Discussing another possibility from last Wednesday
Technical indicators show that the U.S. stock market is now clearly oversold, laying the groundwork for a potential rebound. Historically, the probability of a year-end rally is about 76%. The approaching options expiration may add some volatility, but market sentiment points to an optimistic outlook for year-end.
Some time has passed since the Fed’s remarks on Wednesday. It has largely delivered on its commitments; what really spooked the market was the dot plot for future policy that was published afterward.Looking back, this market move may actually have had another possible explanation.
For several consecutive months before Wednesday, U.S. equities had been caught in an extremely unhealthy, highly concentrated trade. Although market performance seemed calm, as mentioned in the Notes some time ago, The U.S. stock market is now in a portfolio rebalancing period.
The past two weeks were the period when all domestic mutual funds rebalance their portfolios and make annual allocations, so, given that this negative market bias had already been in place, Wednesday’s market may have needed only a small catalyst: sellers who needed to reduce positions would then start selling.
The reason for raising this possibility is that, looking back from today, Last week’s selloff actually occurred across all asset classes: assets with gains were sold, and assets with losses were sold as well.。Here is the key question: if the market was really trading on the Fed’s revised dot plot and expectations of more persistent inflation, then Gold should not have plunged nearly 2.5% on Wednesday.
If the Fed was really saying that inflation was persistent and would rise, Wednesday should have been a big up day for gold. But that did not happen: all kinds of assets moved in the same direction. In that situation, it is more likely that portfolio rebalancing flows were using the news as a pretext.
Bonds were sold, stocks were sold, gold was sold, Bitcoin was sold—everything was sold.All profitable assets were sold to rebalance and make allocations, while all losing assets were removed from the books.
It is understandable and to be expected that many portfolio managers at the time were waiting for the Fed’s move on Wednesday, The market needed only a reason to sell. Everybody was one side of the boat&I needed to clear the deck.
There is an options expiration this week, so the market may still see some volatility, but If this is the path, the market should continue to rebound. Rebalancing purchases would lay the groundwork for a year-end rally through the end of the year; historically, the year-end rally usually does begin the day before Christmas.
2024.12.23
Sources of downside risk next year
So far, the market has interpreted every piece of bad news as good news because the Fed will cut rates.
In rate-cutting cycles, this good-news trade will continue, because there will continue to be plenty of optimism, at least in the first half of the year, such as expectations of Fed rate cuts, more business-friendly tax policies under the new administration, and potential support for infrastructure.
The main issue is that if the economy slows more than expected next year (not a recession, just a slight slowdown),If the slowdown that is highly likely to occur in the economy next year actually happens, the micro-level earnings rationale underpinning the U.S. stock market will no longer hold.
Furthermore, the X date will most likely fall between 7 and -9 of next year; see:https://mp.weixin.qq.com/s/SXwaTPRwELUko7I8MyRW7A(if the United States abolishes the debt ceiling)
In fact, many economies around the world outside the United States—the euro area, the United Kingdom, Asia, and Japan—are growing at rates close to recession levels, barely growing at all. Meanwhile, U.S. economic growth is 3.2%, nearly crushing every other country. That is why U.S. stocks have attracted large inflows.But this anomaly—the growth gap between other countries and the United States—is unsustainable.
Either other countries will shift into high gear and start accelerating their growth to catch up with the United States, or U.S. growth will slow to converge with theirs (which is the more likely scenario), because the current U.S. economic interaction mechanism is still one of importing disinflation and exporting inflation. Over the next year, the United States will import disinflationary pressure from the global economy, This also means that U.S. economic growth will inevitably slow unless there is another large-scale stimulus bill or another type of infrastructure spending bill.
See:
1) Notes 24-12-16 U.S. stocks enter the late-cycle trade View note
2) Notes 24-10-31 Micro-level earnings matter more than macro in the U.S. stock market:View note
2024.12.23
III. Market Pulse
Our latest Comments on the economic and market environment
Note: All content herein is for reference only and does not constitute investment advice, nor does it serve as a basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information as a basis for decision-making.