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

Santa Rally?

The major indexes are slightly extended, but there seems to be room for further growth. AI growth stocks are still leading the bull market, with the best performers gapping higher post-earnings on above-average volume. Stocks that gap higher and maintain their momentum signal that institutional money is entering, and they’re willing to pay a premium for the earnings growth they expect. Stock prices rise when investors price in future earnings expectations. Investors may accept higher price-to-earnings (P/E) multiples for stocks with higher anticipated growth to stay ahead of inflation and taxes. I assess a stock’s P/E ratio against its 5-year range to determine if it’s overpriced. Most growth stocks aren’t near the high P/E levels seen in 2021, which suggests there is still potential for growth in this new AI-driven bull market.

The market expects the Federal Reserve to reduce rates by 25bps this Wednesday, and I expect Jay Powell to deliver on this, avoiding any unwelcome surprises before Christmas. The 20-year long-term Treasury bond market has dropped around 5% since 12/6/24, causing yields to rise ahead of the expected Fed rate cut. This could indicate that inflation remains stubbornly high, signaling that the Fed may not lower rates. However, a politically driven Fed may act differently and lower rates anyway.

Housing stocks have fallen over 10% since 10/16/24, as rising mortgage rates (linked to Treasury yields) make homeownership more difficult for buyers. Many turn to rent as home buyers are priced out due to high mortgage rates. If home builders are not constructing new homes, it impacts sales of furniture and other goods associated with home buying. If this “multiplier effect” slows down, it could slow the broader economy, which is what investors are trying to anticipate when forecasting future earnings. The bond market is nearing a bottom, and yields may soon fall, which could help revive the housing market. This could be a critical week, with the possibility of a Santa Rally to finish the year strong!

Bottom Line: Issachar manages risk to minimize significant losses and capture most of the uptrend. The AI revolution is real, and we are only beginning to see how much potential lies ahead. I expect a Santa Rally at the end of the year. God is Good, and He Loves You! Merry Christmas!

Give thanks to the LORD, for He is good, for His steadfast love endures forever! Psalm 107:1