Everyone is hoping for the Federal Reserve to cut interest rates early next year, seemingly forgetting that the Fed cuts at the end of an expansion, not the beginning of a new one.
Nothing matters until it matters. Then, when it matters, it’s the only thing that matters. Market momentum here is being driven by hope. Hope that the Fed pulled it off, that there won’t be a credit event. Hope that China’s economic collapse won’t spill over into the US. And that lower interest rates will spur economic activity by making borrowing cheaper.
Traditionally, December is a period of lower volatility, which could support the continuation of November’s momentum. We’ve seen some hesitation in stocks to push higher, and all the momentum got pushed into long-duration Treasurys.
Why there? Because the hope may not be justified in stocks as several potential catalysts could derail the bulls. Inflation, jobs data, and momentum reversal are among the most significant factors that could influence market dynamics into the end of the year.
Rate Cut Hopes Create Market Peril
Unexpected inflation data could cause investors to reassess their expectations about future rate cuts, potentially leading to a shift in market sentiment. Similarly, employment data could also influence perceptions of the economy’s health, which would indirectly impact expectations of future rate cuts.
Does Fed Chair Jerome Powell want stocks to run away here? Maybe. Maybe not. But either way, it’s not really in his control.
A momentum reversal could be triggered by a variety of factors, including changes in global economic conditions, policy announcements from other central banks, or significant geopolitical events. Any of these could potentially disrupt the current market movement and dampen the effect of Fed rate cut hopes.
One thing that seems to be taking place is relative strength in utility stocks, consumer staple stocks, and healthcare stocks. These sectors are typically less sensitive to economic cycles and can provide steady returns even in a volatile market environment. There’s been some encouraging relative behavior here, which makes me think that the risk is that hopes are dashed for equities into the end of year.
Utilities, for instance, provide essential services, making their revenues relatively stable regardless of economic conditions. Similarly, consumer staples companies produce goods that are in constant demand, regardless of the state of the economy. Healthcare, too, is a sector that tends to be resilient in the face of economic downturns, given the constant demand for health services.
The Bottom Line
Why would these areas be showing signs of life if hope for a Fed cut were a good thing?
I don’t know the answer, but it does seem plausible that hope for continued stock market momentum and a Santa Clause rally may prove to be unjustified, as Treasurys, gold, and defensive sectors continue to attract money.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
