@theMarket: Markets Consolidate Gains

In the coming week, there are three hurdles that investors need to confront. Inflation data, a bond auction, and an FOMC meeting.

 

Investors are now convinced that job growth is finally slowing, inflation is a thing of the past and that the Fed will begin cutting interest rates as early as the second quarter of 2024. As such, they expect next week's Consumer Price Index will show further declines in headline inflation. Despite the almost one percent decline in the U.S. Ten-year bond, the U.S. Treasury's 10- and 20-year bond auctions will go off without a hitch. And finally, since inflation is dead and jobs are falling in an election year, the Fed will have no choice but to cut interest rates before the presidential elections.

 

Now if that sounds a bit like a Goldilocks scenario, I wouldn't blame you. There have been hundreds of strategy reports that have said the same thing with colorful charts and graphs proving these points circulating Wall Street over the last month. Given that, and knowing how the stock market works, all these positive expectations have already been discounted by the stock market.

 

What this means to me, is that each of these events must deliver results that are much better than expectations to move markets higher. We get the CPI report on Dec. 12. On Dec. 13 during the FOMC meeting, we need to see Fed Chair Jerome Powell not only indicate no more rate hikes but hint at cutting rates. And finally, U.S. Treasury auctions must be snapped up as a real bargain.

 

If that does not happen, use the example of Friday's unemployment report for November as a tell. Non-farm payrolls were slightly stronger than investors expected. The unemployment rate ticked down to 3.7 percent from 3.9 percent in October. The U.S. economy added 199,000 jobs versus the 185,000 jobs expected. That was a mild miss, but the immediate reaction in the bond market was to see the prices of both the ten-year and thirty-year bonds drop by more than 1 percent, while the dollar strengthened by more than half a percent. In other words, both equities and bond yields are priced for perfection and there is little room for disappointments.

 

This week, the decline in bond yields, coupled with the weakness in the U.S. dollar, has provided a cushion for the equity markets. It has been encouraging that small-cap stocks have largely led the markets throughout the week, while the Mag Seven gang has taken a bit of a back seat.

 

I suspect that the small-cap universe will see even more gains in the weeks ahead as will other areas that have languished this past year. The biotech area has also outperformed this week, and that will also be a winner, especially next year.

 

Another asset that I like has now come back into range. Precious metals have pulled back. Gold, after hitting a record high, is consolidating. I am looking at roughly $2,000 an ounce. as a possible entry point for those who want to speculate. Silver is also consolidating. Crypto, on the other hand, is close to the year's high and may also need to take a pause and consolidate before moving higher. 

 

Energy is starting to look tempting. I think the sell-off may be overdone and we could see a bottom sometime this coming week. For the year ahead. I think technology (AI), industries, and financials should be at the top of your wish list of areas that look especially interesting to me.  As for the coming week, I am still expecting more consolidation before an upsurge in stocks to close out the year. Use any dips to add to positions.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.