We expect stocks to finally exit the "zone of hesitation" after Dec FOMC rate decision (Wed 2pm ET). Even a "hawkish" cut supports a YE rally. Array ( [cookie] => 44ca42-b0fab3-1c209f-20e5a9-602774 [current_usage] => 1 [max_usage] => 2 [current_usage_crypto] => 2 [max_usage_crypto] => 2 [lock] => [message] => [error] => [active_member] => 0 [subscriber] => 0 [role] => [visitor_id] => 44902 [reason] => Usage under limits [method] => ) 1 and can accesss 1

VIDEO: We think probabilities favor stocks rallying post-Dec FOMC rate decision, as this key uncertainty is lifted

Please click below to view our Macro Minute (duration: 5:22)

At the start of December, our view was that equity markets were entering a “zone of hesitation” book-ended by the Nov jobs report (Dec 6th) and Dec FOMC rate decision (12/18) as this gauntlet of macro data was likely to cause investors to be sidelined. This has in fact been the case, as stocks have been rangebound since Dec 6th.

• However, we believe the year-end rally likely starts post-Dec FOMC rate decision. That decision will be made at 2pm ET today and the press conference will follow. You might naturally wonder why we think equity markets rally post the Fed decision.
• First, equities have been in this holding pattern, the “zone of hesitation” that has been in place. And the finality of getting the rate decision behind us is the “buy the news event.” For the past 2 years, stocks have typically rallied into the FOMC rate decision:
  – since Fed pivot (9 meetings),
  – the median 1-week move into FOMC is +1.2%
  – over past week, S&P 500 is only up 0.3%
  – the median 1-week move post-FOMC is +1.0%
  – that is 2% total gain from -5D to +5D
  – thus, the probabilities favor a larger move post-FOMC +2%??
• Second, we think “hawkish” expectations have gotten too strong. We hear from many investors citing that they expect this to be a “hawkish” cut, meaning the Fed will cut but then signal strongly the notion that they are closer to ending the cutting cycle.
  – why?
  – many investors believe inflation is “sticky” and thus
  – Fed will keep rates high
• The data just does not support this view that inflation is sticky and thus, Fed needs to keep rates high:
  – Nov Core CPI YoY is +3.3%, +1.3% above “target”
  – Shelter is +4.8% YoY, or +0.87% of excess
  – Auto insurance is +12.7%, or +0.31%
  – Recreation is +3.5%, or +0.05%
  – The 3 combined is +1.23% of the +1.31% of excess
• Does the Fed think keeping policy rates high will cause these 3 categories to fall towards the target? Fed Chair Powell has addressed auto insurance and shelter multiple times in recent appearances. The Fed views these are lagging indicators and individually trending towards target. This is counter to the notion that inflation is “sticky” and rates have to stay high.
• Currently, Fed funds futures sees 3 cuts in 2025 and we think the Dec FOMC press conference will likely see this figure. But we believe that it would actually better for the Fed to make fewer cuts in 2025. We have discussed this previously, but the factors are:
  – Fed needs to get to “Neutral”
  – Fed funds currently 4.75%
  – Neutral rate is 2.50% to 3.00%
  – Still need 6 to 8 cuts (25bp each)
  – Fewer cuts in 2025 = longer cutting cycle
• This week is the last week of major macro data:
  – 12/16 Mon 8:30 AM ET: Dec Empire Manufacturing Survey    0.2 vs 10.0e
  – 12/16 Mon 9:45 AM ET: Dec P S&P Global Manufacturing PMI    48.3 vs 49.5e
  – 12/16 Mon 9:45 AM ET: Dec P S&P Global Services PMI    58.5 vs 55.7e
  – 12/17 Tue 8:30 AM ET: Nov Retail Sales Advanced MoM    0.7% vs 0.6%e
  – 12/17 Tue 9:00 AM ET: Dec M Manheim Used Vehicle Index    205.4
  – 12/17 Tue 10:00 AM ET: Dec NAHB Housing Market Index    46 vs 47e
  – 12/18 Wed 2:00 PM ET: Dec FOMC Decision     -25bpe
  – 12/19 Thu 8:30 AM ET: 3Q T 2024 GDP QoQ    2.8%e
  – 12/19 Thu 8:30 AM ET: Dec Philly Fed Business Outlook    2.8e
  – 12/19 Thu 10:00 AM ET: Nov Existing Home Sales    4.09me
  – 12/19 Thu 4:00 PM ET: Oct Net TIC Flows
  – 12/20 Fri 8:30 AM ET: Nov Core PCE MoM    0.17%e
  – 12/20 Fri 10:00 AM ET: Dec F U. Mich. 1yr Inf Exp

Bottom line: Stay on target into year-end

We see stocks rallying into year-end. We are now exiting the “zone of hesitation.” But we would urge investors to buy this dip. That said, we see more upside for other groups. This holds whether looking at 2016, or whether thinking of a dovish Fed. The drivers are:

• de-regulation
• drop in cost of capital for businesses
• general “animal spirits” given Republican White House and Senate

This favors the following groups:

• Small-caps: IWM -2.30%  IJR -2.18%
• Cyclicals: XLF -0.91%  KRE -1.81%  XLI -2.08%
• Bitcoin: BTC MSTR -3.87%  SMLR -3.12%

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Key incoming data December:

• 12/2 9:45 AM ET: Nov F S&P Global Manufacturing PMI Tame
• 12/2 10:00 AM ET: Nov ISM Manufacturing PMI Tame
• 12/3 10:00 AM ET: Oct JOLTS Job Openings Tame
• 12/4 9:45 AM ET: Nov F S&P Global Services PMI Tame
• 12/4 10:00 AM ET: Nov ISM Services PMI Tame
• 12/4 10:00 AM ET: Oct F Durable Goods Orders Tame
• 12/4 2:00 PM ET:  Fed Releases Beige Book Dovish
• 12/5 8:30 AM ET: Oct Trade Balance Tame
• 12/6 8:30 AM ET: Nov Non-Farm Payrolls Tame
• 12/6 9:00 AM ET: Nov F Manheim Used vehicle index Mixed
• 12/6 10:00 AM ET: Dec P U. Mich. Sentiment and Inflation Expectation Tame
• 12/9 11:00 AM ET: Nov NY Fed 1yr Inf Exp Tame
• 12/10 6:00 AM ET: Nov Small Business Optimism Survey Tame
• 12/10 8:30 AM ET: 3Q F Non-Farm Productivity Tame
• 12/10 8:30 AM ET: 3Q F Unit Labor Costs Tame
• 12/11 8:30 AM ET: Nov CPI Tame
• 12/12 8:30 AM ET: Nov PPI Mixed
• 12/16 8:30 AM ET: Dec Empire Manufacturing Survey Tame
• 12/16 9:45 AM ET: Dec P S&P Global Manufacturing PMI Tame
• 12/16 9:45 AM ET: Dec p S&P Global Services PMI Tame
• 12/17 8:30 AM ET: Nov Retail Sales Data Tame
• 12/17 9:00 AM ET: Dec P Manheim Used vehicle index Tame
• 12/17 10:00 AM ET: Dec NAHB Housing Market Index Tame
• 12/18 2:00 PM ET: Dec FOMC Decision
• 12/19 8:30 AM ET: 3Q T 2024 GDP
• 12/19 8:30 AM ET: Dec Philly Fed Business Outlook
• 12/19 10:00 AM ET: Nov Existing Home Sales
• 12/19 4:00 PM ET: Oct Net TIC Flows
• 12/20 8:30 AM ET: Nov PCE Deflator
• 12/20 10:00 AM ET: Dec F U. Mich. Sentiment and Inflation Expectation
• 12/23 8:30 AM ET: Nov Chicago Fed Nat Activity Index
• 12/23 10:00 AM ET: Dec Conference Board Consumer Confidence
• 12/24 10:00 AM ET: Nov New Home Sales
• 12/24 10:00 AM ET: Nov P Durable Goods Orders
• 12/30 10:30 AM ET: Dec Dallas Fed Manuf. Activity Survey
• 12/31 9:00 AM ET: Oct S&P CoreLogic CS home price

Economic Data Performance Tracker 2024:

Economic Data Performance Tracker 2023: