Ready for the Santa Rally?
The major indexes were on an upswing before Wednesday’s Fed’s 25bps rate cut announcement. However, a sharp decline followed after the market interpreted the Fed’s actions as signaling only two more rate cuts in 2025 instead of the expected four. The S&P 500 bounced back from its lows, finding support at its 50-day moving average (DMA). A high-volume recovery is a positive sign that buyers are in control. Although sellers pushed the index below its 50-DMA on Wednesday and Thursday with above-average volume, buyers reclaimed control on Friday, forcing the index back above the line with even greater volume. The NASDAQ 100 Tech index dropped close to its 50-DMA on above-average volume but also rallied from the lows, indicating strong institutional support. This suggests the recent shakeout is over, and the market may continue its upward momentum.
The 20-year Treasury bond prices have fallen by about 12% since September 16, 2024 (down about 7% year-to-date) after the Fed began cutting rates. This rare scenario — the Fed lowering rates while the market raises them — reflects concerns that inflation remains a threat. Typically, when the Fed cuts rates, market-driven rates decline as well, but in this case, the market fears that the Fed’s actions could spur more inflation. The Fed aims to keep rates low so the Treasury can issue lower-rate, shorter-term bonds to fund the growing national debt. The dollar has risen as foreign investors convert their currencies to buy our higher-yielding Treasury bonds. Homebuilding and regional bank stocks have been crushed by rising rates, which leads to lower economic growth. Meanwhile, gold has declined due to the dollar’s strength, though 20-year Treasuries may have reached a bottom on April 25. If this bottom holds, we could see the dollar decline, gold rally, and yields fall, which would be favorable for growth stocks.
Bottom Line: After 34 years of managing risk, I’ve witnessed investors abandon stock-picking numerous times, typically after two years of outperformance by index investing. This trend usually leads to a shift towards just buying indexes. However, I believe that in 2025, while index investing may still perform well, stock picking could outperform the indexes. Wednesday and Thursday seem like an excess froth shakeout, and Friday’s triple witching options expiration ripping higher into the close, sets the stage for a Santa Rally. I firmly believe stocks with accelerating earnings and sales could outperform those with average earnings and sales. The AI revolution will continue to grow and improve, so let’s ride the wave while it lasts. Wishing you and your family the Best Blessed Christmas Ever — because it’s all about Jesus! God is Love!
God so loved the world that he gave his only Son, that whoever believes in him shall not perish but have eternal life. John 3:16