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As we enter the last trading week of 2023, it looks like not a creature is stirring. It’s a unique combination of positive inflation data, promising economic indicators, and potential rate cuts shaping the market narrative. And while I keep stressing that we don’t know if the bear market is over until we take out the prior inflation-adjusted high of 2021, the bulls won — mainly because of this huge move since the start of November.
Despite the slowdown in the rally of risk assets pre-Christmas, market momentum doesn’t show signs of stopping. Small-cap stocks continue to lead large-caps, hinting at a breakout that could further fortify the short-term uptrend. High-beta and growth stocks remain dominant. However, technology stocks seem to be on the back foot as cyclicals are benefiting the most from the post-Federal-Reserve-shift euphoria.
Factors at Play
Inflation data released recently indicates that the Federal Reserve is steadily moving toward achieving its goal of bringing inflation back to 2%. This development could pave the way for interest rate cuts, a scenario that has partially supported the market rally in 2023. The Personal Consumption Expenditures Price Index revealed that prices increased by 3.2% over the last year in November, marking the slowest annual increase since April 2021.
Recession signals are currently minimal. Economic activity in the United States has shown signs of picking up, as indicated by the Chicago Fed report. Interest rates have moderated from the decade-plus highs reached during the fall. The Dow Jones Industrial Average and the S&P 500 are on the brink of reaching record highs (again, nominal — more significant highs will take time if we are out of the bear market).
Remarkably, the housing market’s strength continues to persist despite the steep rise in prices. The S&P CoreLogic Case-Shiller Index reported a 4.8% annual increase in home prices in October. This rise, however, could pose challenges to the Federal Reserve’s fight against inflation and remains key to watch into 2024.
What Comes Next for the Stock Market
I remain cautious in my view. The strength in both Treasurys and gold suggests potential vulnerability if any data related to inflation, earnings or unemployment conflicts with the current narrative. Traders can expect a quiet week ahead due to the holiday season and a clear economic and earnings calendar. The last trading week of 2023 looks like a quiet one overall. From promising inflation data to anticipated rate cuts and strong economic indicators, market trends hint at a strong close to 2023.
However, investors need to keep an eye on data related to inflation, earnings and unemployment to navigate any potential vulnerabilities. And if Treasurys and gold continue to show robust strength, it would be a warning sign of a rough start to 2024.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
