Closing Thoughts for the Week

The markets got the one thing they wanted for Christmas last week - confirmation of a Fed pivot from Powell himself. Stock and bond prices both rallied hard, but I wonder what changed for the central bank over the past couple months. Let’s see if credit risk enters the equation next. The market seems to genuinely not be buying what the Fed is selling.

This is looking more and more like a market that’s being driven by bonds, not stocks. While the recent rally in long bonds has been powerful, there’s a pretty good possibility that it’s gotten overdone in the short-term. Right now, I think there’s a major disconnect between what the Fed will do and what the market thinks the Fed will do. This doesn’t really look like the signal mix that would indicate a big Santa rally to finish off the year.

When I look at the direction of the markets and the underlying factors driving it, I see a rally that has moved too far, too fast and is in the dangerous position of reversing course at any time. I think the market has probably overdone it on the idea that the Fed is going to begin cutting interest rates very soon. These moves don’t happen on interest rate movements alone. There’s some investor fear built in as well.