· Fed’s potential rate cuts, boost sentiment

· Possible market correction, despite strong rally

The S&P 500 is flying in November

The recent stock market rally in November has led to a significant shift in investor behavior, with many discarding cautious approaches. The S&P 500 has seen remarkable growth of nearly 10% this month alone.

This change in sentiment is primarily fueled by the belief that the Federal Reserve will halt interest rate hikes and potentially reduce rates in 2024.

That has led to investors piling into stocks at the fastest pace in nearly two years as market participants are betting on a soft-landing scenario.

On top of that, there are the prospects of lower bond yields, above-consensus economic growth, and a possible end of the earnings recession, as the US economy has shown incredible resilience despite the dramatic rate hikes and contracting money supply by the Fed.

Source: Bloomberg

Federal Reserve’s aggressive interest rate hikes have seemingly had limited impact on the U.S. economy, which continues to display impressive robustness.

The rally experienced some tailwinds thanks to oil prices retreating and VIX dropping to a handle of 12, the lowest since January 2020.

WTI has been down 17% since the start of October, and OPEC+ members, for now, disagree on supply cuts, which will undoubtedly help the Fed’s ongoing fight against inflation.

Peak Fed Hikes

Recent Federal Reserve minutes indicate a cautious approach toward future interest rate decisions, aiming to bring inflation down to their 2% target.

Source: CNBC

Nonetheless, US Equity markets historically perform strongly after the end of the hiking cycle.

The S&P 500 and Nasdaq return on an average of 14.5% and 13.4%, respectively, 12 months after the last rate hike.

If history is any guide, both large cap and small indices have some upside potential.

However, elevated greed and high market exposure have preceded turning points for the markets.

The NAAIM exposure index, used to gauge the sentiment and positioning of active investment managers in the U.S. stock market, is once again stretched.

CNN’s “fear and greed index” has more than tripled in a month, shifting from fear to greed.

Source: TradingView

Can the rally continue?

The recent rally might face some correction, as investors are chasing higher returns, which might have contributed to a FOMO rally.

A pullback scenario is entirely possible and even healthy, given how strong and long the recent rally has been in recent weeks.

That is not to say that the market does not have the legs to go higher, but a mild correction and possibly a Christmas rally might be a more plausible continuation for the S&P 500.

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