·       S&P 500 has rallied over 35% since October 2022

·       Probability of March rate cuts tumble

S&P 500 Bull Run

New Bull Market, the S&P closed at 4839.81, nearly 1% higher than the previous all-time high of 4796.56.

Technically speaking, the bull market has started. In October 2022, there was surging inflation, the Fed was behind the curve, and many market participants expected a recession to hit in 2023.

More than one year later, those fears did not materialize.

Source: Yahoo Finance

Inflation moderated, the Fed reached its peak cycle rates, and earnings seem to rebound.

Stocks have climbed due to falling inflation, which caused investors to anticipate as many as six rate cuts this year as lower rates boost company valuations as it becomes cheaper for them and consumers to borrow, which caused a massive stock rally at the end of last year.

New Year, New Data

Bond yields have gone marginally higher since the New Year, as they plunged sharply at the end of 2023.

Last week saw a sharp rise in Treasury bond yields, a key indicator for borrowing expenses, following Federal Reserve Governor Christopher Waller’s warning against premature rate cuts.

This upward trend in yields persisted as reports on retail sales, housing starts, and unemployment claims all surpassed economists’ expectations.

The 10-year U.S. Treasury bond yield concluded the week at 4.15%, an increase from its starting point at the beginning of the year, which was 3.86%.

Some analysts rightly point out that the market might have gone ahead of itself, as the rate cuts might not materialize as quickly as the bullish investors are pricing them in.

Could it be that the equities rally due to irrational exuberance? Seems like it.

Typically, there is a saying about how January finishes, so the rest of the year will be for the financial markets.

A few data points will provide critical insights as to why we are heading for a soft landing, namely, Fourth Quarter GDP, the Fed’s Favourite Inflation Index, and Fed Meeting and Interest Rate Decision.

Source: CME Fed Watch

Overall, Economic growth, inflation, and the Fed will continue to be the key drivers of financial markets this year.

The ideal scenario would be for inflation to moderate; this will allow the Fed to cut rates, and potentially, growth will re-accelerate.

However, market volatility seems to be a very plausible option in the near term, especially if given the likelihood that the Fed might push against rate cuts in March, which has tumbled from 73.4% to 53.8% in the course of the last three weeks.

Hence, prepare for a bumpy January and some volatility ahead.

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