Everyone loves a “Santa Claus rally.”
It’s the most known and expected of all the seasonal stock market periods.
People are in a good mood.
Plus, investors go through the process of tax-loss selling “bad stocks” to buy trending “good stocks.”
And those trending “good stocks” are more likely to have momentum behind them… helping push the market higher. That’s the theory, anyway.
But is a December rally guaranteed?
Or what if this is more of a “hope” rally than a Santa Claus rally… one built on a false hope? The false hope that the Federal Reserve will cut rates next year.
We’ll look at that today and explain what you – as an investor – should do next…
The S&P 500 closed down 0.1% to end the day at 4,567.18… the NASDAQ added 0.3%, to close at 14,229.91.
For individual stocks, Microsoft closed up 0.9% to $372.52… Apple ended higher by 2.1% at $193.42… and Tesla ended the day at $238.72, a 1.3% gain.
In commodities, today’s prices and the gain or fall over yesterday, West Texas Intermediate crude oil trades at $72.37, down 93 cents… gold is $2,037.60 per troy ounce, down $4.40… and bitcoin is $43,757, up $1,932.90 from yesterday.
And now, back to our story…
The $100 Trillion “Third Wave”
One quick aside. If you haven’t registered for Teeka Tiwari’s “Third Wave” event tomorrow night, please check it out.
Most importantly, Teeka will explain the factors behind a $100 trillion market move that he says could give you the chance to financially secure your future. You can build the kind of wealth that lasts for generations.
It’s an event you shouldn’t miss. Enroll here.
And now, truly, back to our story…
Try to Figure This Out!
Bloomberg reported this week:
Wall Street kicked off the week with losses, with both stocks and bonds down in a signal that traders’ aggressive pricing of Federal Reserve rate cuts may have gone too far.
Let’s stop and think… and be rational.
Why have stocks gone up?
If the commentary is right, it’s because the market believes a recession could hit the economy sometime next year.
Why is that “good” for stocks?
Because the same commentary claims it makes it less likely the Federal Reserve will increase rates any further.
In which case, does that mean the economy could avoid a recession? But wouldn’t that risk inflation picking up again?
And couldn’t that cause the Fed to increase rates until it gets slightly closer to inducing a recession?
Will that be good for stocks too?
We’ll stop there. Our heads are spinning.
Too many questions. Too many convoluted answers.
This is, we fear, why the market is getting so muddled right now.
The fact is, if you look back over the past 40 years, the data is 50/50 at best about whether falling interest rates will help stocks.
Look at the chart below. It shows the U.S. Federal Funds Rate overlaid with the S&P 500. We won’t go into every up and down, just the broader trends.
You can see it for yourself…
From 1987 to 2000, interest rates went up and down. Stocks – for the most part, went up.
From 2001 to 2003, interest rates fell… as did stocks.
From 2003 to 2007, interest rates went up… as did stocks.
From 2009 to 2019, interest rates were flat then took off… stocks mostly went up.
In other words, we see nothing to say that, taken alone, the rising or falling of interest rates will guarantee the market moving in one direction or the other.
That doesn’t mean interest rates are irrelevant. As we’ve mentioned before, only two things move markets: interest rates and earnings.
But if the market is looking purely at interest rates, it’s only looking at half the story.
And as for “cheering on” a recession in a belief that will help stock prices… Perhaps that says more about the lack of quality in the thinking of most mainstream analyses.
For us, when it comes to cheering the market, we prefer to do it when it’s justified.
Don’t tell us to buy stocks because a recession is on the cards… don’t tell us to buy stocks because the Fed will soon cut rates due to a potential recession…
Instead, tell us to buy stocks because valuations are cheap… or that earnings are set to grow… or some innovation or technology is a game-changer for American businesses.
Get us excited about the stocks and the story behind their growth. That’s the real story we want to hear.
Right now, this whole Fed and interest rate business feels too much like a trade based on hope rather than analysis.
We prefer analysis.
For that reason, while we’d love to see a Santa Claus rally take stocks to new highs, we can’t help but think stock investors should remain cautious.
We wrote quite extensively about risk management in Friday’s Daily Cut. If you haven’t checked it out yet, we encourage you to do so here.
Check Your Stops
We’re dead serious about risk management. Too often in the newsletter industry, folks will hammer on about risk management after the fact.
At Legacy Research, we’ve been guilty of that in the past too. But the best time to think about risk management is before bad stuff happens.
Right now, the market is still pretty close to its record highs. But who knows for sure where it will be a month or two from now?
Read Friday’s Daily Cut, and make sure you’ve put at least some basic risk management measures in place.
The most obvious is to use stop losses. All of our experts use risk management in one form or another. Check your stock portfolio, and then look on our members’ websites to see where you should place stop losses.
You won’t regret doing so.
Up or Down or Both?
One more thing on the whole Fed and interest-rate-anticipation angle.
The major problem is that it’s not just about figuring out what the Fed will do. You’re relying on what the market thinks the Fed will do rather than what the Fed will actually do.
Meanwhile, the Fed is watching the market… to see what the market thinks the Fed will do… so the Fed can react to that… or not.
If you don’t know for sure who’s reacting to what, how can you take any kind of view where the market will be six months from now?
It’s like M.C. Escher’s famous lithograph of the ascending and descending stairs.
You don’t know what is up or down or where to find the beginning. You’re just left in a state of confusion.
Real Assets Moving
If it’s hard to get excited about stocks, what can we get excited about?
According to colleague Chris Weber, we can get excited about gold. Here’s what he just told his subscribers yesterday afternoon:
Until Friday, we were prepared to lead this issue off with bonds, or Argentina. But as you likely know, Friday saw gold go to new record highs. We haven’t seen that since August 2020.
Now we wait and see what kind of follow-through we will have.
My instinct, for what it’s worth, is that we are at the start of a strong bull move in the entire precious metals complex. It was not unexpected, since looking out at the entire investment universe, the ‘PM complex’ was the only area trading at bargain rates. Thus, a bull leg was only a matter of time.
During such bull moves, silver normally moves up faster than gold. And, true to form, this has been the case during the last few weeks.
Both gold and silver began their current bull moves on October 4, just under two months ago.
Chris goes on to explain that since October 4, gold has gained 14.6% and silver is up 21.2%.
Since he went to press, both gold and silver have fallen back a couple of percent or so.
Even so. Don’t underestimate these moves.
Real assets have finally begun to move. We’ll add bitcoin into the mix as well. As we write, it’s above $42,000. It has more than doubled over the past year.
Our main task at the Daily Cut is to try to “connect the dots.” That is, we help you figure out what events are about, what makes them important, what their consequences are, and what it all means for you.
But sometimes, we see the individual “dots,” but can’t yet figure out how they connect to anything. Maybe they never will connect to anything.
Regardless, if those unconnected dots feel as though they could be important, we’ll mention them here. And we’ll let you draw your own conclusions.
Today’s unconnected dots…
Here’s another reason to not get carried away. From the Financial Times:
A surge in the number of Americans choosing “buy now, pay later” payment methods for their holiday shopping is raising concerns among advocacy groups that many lower-income consumers will find themselves struggling to pay their bills in the new year.
Usage of the modern-day layaway plan – in which payments are typically made in installments with no interest except to the merchant – has hit an all-time high this holiday season. BNPL contributed to $10.1 billion of online spending since the start of November, up 17% from the same period of 2022, Adobe Analytics calculated.
Any one piece of data doesn’t guarantee the onset of an economic disaster.
But it’s another data point to put in our back pocket for another day.
Today’s top-gaining ETFs…
Invesco Taxable Municipal Bond ETF (BAB) +1.7%
First Trust Long Duration Opportunities ETF (LGOV) +1.5%
First Trust India NIFTY 50 Equal Weight ETF (NFTY) +1.4%
Amplify Transformational Data Sharing ETF (BLOK) +1.3%
Franklin FTSE India ETF (FLIN) +1.2%
Today’s biggest-losing ETFs…
Xtrackers MSCI China A Inclusion Equity ETF (ASHX) -2.5%
KraneShares MSCI All China Health Care Index ETF (KURE) -2.1%
KraneShares Bosera MSCI China A 50 Connect Index ETF (KBA) -2.1%
Global X Lithium & Battery Tech ETF (LIT) -2.1%
Invesco S&P SmallCap 600 Pure Value ETF (RZV) -2%
Reader Ralph D. writes:
Beneath connect the dots and market news, you give other possible trades without their symbols. Is there a reason you don’t? Doing so would be an invaluable customer service! Thank you.
Our reply: Good point. We’ve begun adding the ticker symbol to the top-gaining ETFs. Just remember, these aren’t “possible trades,” they merely show which sector ETFs have moved up or down the most that day.
We figure that could be useful information to know.
If you have any questions or comments for our experts here at Legacy Research, we’d love to hear from you.
Write to us at [email protected] and just type “Daily Cut mailbag” in the subject line.
Editor, The Daily Cut