Here comes Santa Claus?
The typical year-end rally may be coming a little sooner this year.
Ho ho ho! Sure, the calendar still says November for another two days. But investors are already in a joyous holiday mood. The Dow, S&P 500 and Nasdaq have surged this month and all three indexes (indices? Also, the Dow is technically an average and not an index. But I digress.) are not far from their 52-week highs. Even meme stocks like GameStop are rallying again.
Why are market participants to festive? For one, Wall Street is clearly hoping that the Federal Reserve is going to soon pivot and start cutting interest rates following its series of hikes last year and earlier this year.
Even though the economy grew at a scintillating (revised higher) annualized pace of 5.2% in the third quarter, few expect that level of growth (or runaway inflation) to continue. In fact, traders are now pricing in the possibility of a rate cut as soon as next March. If not then, it looks like May or June are likely for the Fed to start easing.
Earnings continue to be decent and analysts are expecting decent (if not spectacular) growth in the fourth quarter. But here’s the good news. Wall Street is forecasting double-digit growth in 2024. Companies are also flush with cash and using it to reward shareholders. GM’s big dividend hike, stock buyback and reinstated guidance are just the latest reasons for Wall Street excitement.
But clearly a lot of risks remain for investors. Valuations are higher than normal. Next year could also be a messy one due to the presidential election. There are a lot of headline risks. And the hopes for an economic soft landing could wind up being dashed. It’s still not clear if all those rate hikes will eventually lead to a recession. (One has to be coming at some point. The hope is that it could be more like a mild 2001-esque one as opposed to the 2008-2009 Great Recession.)
Still, investors aren’t worried about all that right now. They’re drinking the spiked eggnog and enjoying the typical end of the year rally…even if it’s a little earlier than usual.