Last Friday, the U.S. stock market closed with mixed results, with the Dow and Nasdaq witnessing positive movements, while the S&P remained relatively unchanged. 

Triple Witching And Dovish Fed Remarks

The trading session was notably influenced by the expiration of futures and options, known as triple witching. However, the most significant impact came from the dovish statements made by Federal Reserve Chairman Jerome Powell and the updated fed dot plot. 

The unexpected revelation that the Fed anticipates a 75 basis point cut in the upcoming year surprised the market, resulting in subsequent fluctuations. Despite attempts by some Fed officials to adopt a slightly hawkish tone, the 10-year yield slipped below 4%, emphasizing the initial dovish stance’s impact. 

Weekly Performance And Market Trends 

In the broader context, U.S. stocks marked their seventh consecutive week of gains. This streak represents the most substantial winning streak for the S&P 500 since 2017 and for the Dow since 2019. 

Notable statistics for the week include a 2.9% gain for the Dow Jones Industrial Average, a 2.5% increase for the S&P 500 Index, and a 2.9% rise for the Nasdaq.  

Here are the closing levels for Friday, December 15^th, 2023: 

2023 Recap: Surprises And Market Shift 

The year started with pessimism following a challenging 2022. The Fed’s indication of multiple hikes in 2023 to curb inflation set a bleak tone. However, the market reacted inversely, beginning a rally that is now heading towards all-time highs. 

The focus shifted more towards when the Fed would cut rates rather than when the hikes would conclude. Even with robust employment, the expected selloff due to potential rate hikes was absorbed as a sign of a strong economy, fueling market optimism. 

Reflection On 2023 And Outlook For 2024 

The market’s focus shifted towards anticipating Fed cuts rather than the endpoint of hikes. Despite delays in expected cuts, the market remained unfazed, adjusting expectations and continuing to buy. 

The recurrent discussion of recession throughout the year did not materialize due to robust employment. Paradoxically, strong employment empowered the Fed to consider hikes, which, instead of causing a selloff, reinforced perceptions of a strong economy, stimulating buying behavior. 

Reflecting on this year, many bears, including this writer, are humbled by their misjudgments. Despite expectations of higher interest rates crippling the economy, the market experienced a melt-up. 

Future Prospects And Risks 

Looking ahead to 2024, with anticipated cuts as early as March, the current rally is expected to persist. While the mega-cap performance contributed to this year’s rally, the Dow and Russell 2000’s surge indicates a broader market involvement with potential benefits for lagging stocks. 

However, risks loom. The market appears overbought, and concerns linger about inflation not reaching the Fed’s 2% target and the delayed effects of higher rates potentially leading to a recession. Indicators such as Gold prices, 10-year yields, and Crude Oil suggest a potential slowdown. 

Additionally, presidential elections could introduce volatility, although historically, stock prices react more to economic factors like inflation. 

Cautionary Notes 

In the near term, a stock market meltdown seems unlikely, bolstering bullish sentiment. However, vigilance remains crucial amidst potential risks.  

As we wrap up 2023, I extend warm wishes for a Merry Christmas and a Happy New Year to you and your families. See you in 2024 for more market insights and analysis. 

Source: CBOE, Bloomberg 

This commentary is written by James Gomes, a seasoned finance industry veteran with extensive experience of over 30 years, including a substantial tenure at a reputable U.S. bank exceeding 20 years.