15.11.2023 – The year-end rally is probably underway. Yesterday’s US figures on consumer prices could have been the initial spark.
Of course, we can only answer the question of all questions with absolute certainty in retrospect. Will the year-end rally that is always reliably predicted materialise or not? If we look at the reaction on Wall Street yesterday, it speaks volumes: the bulls want to invest. The S&P 500 rallied when the news with the Consumer Price Index hit the tickers, here is the hourly chart. The Russell 2000 with shares of smaller companies recorded the strongest rise this year at over 5 per cent. US bonds were in demand again.
Source: Bernstein Bank GmbH
This is what happened: CPI for October was reported cooler than expected. Thus, the monthly comparison was unchanged; most expectations had been for an increase of 0.1 per cent. In September, the increase had still been 0.4 per cent. Year-on-year, the inflation rate slipped from 3.7 per cent to 3.2 per cent – analysts had predicted 3.3 per cent.
Short squeeze
As you can see, even a slight undercutting of the forecasts caused a small buying frenzy. A lot of investment pressure has obviously built up. We also saw a short squeeze. The financial blog “ZeroHedge” said that a lot of hedge funds had been caught on the wrong foot. Even super bear Michael Burry, who became a billionaire with his big short during the financial crisis in 2008, was wrong recently, realised a massive loss and ultimately liquidated many positions.
Brake for the Fed
The take-home message from all of this is that the Federal Reserve now has far fewer arguments for raising interest rates further or even keeping them higher. According to the website Barchart.com, the market currently sees the probability of a new interest rate hike on 12 December and 30 January at zero per cent. In addition, investors are 90 per cent certain that the Fed will cut interest rates again from 30 April 2024.
Nick Timiraos, Chief Economics Correspondent for the Wall Street Journal, commented that the Fed’s last rate hike for the time being was in July. The journalist is regarded as the unofficial mouthpiece of the Fed, which uses this channel to prepare the market for what is to come. Timiraos continued: “The big discussion within the Fed at the next meeting will only centre on how the fact that the central bank is de facto on hold should be communicated.
Winning stocks wanted
Our conclusion: As is so often the case, a lot of capital from previously sceptical fund managers is likely to flow into the equity market at the end of the year. They will buy those shares that have already performed well anyway – no asset manager wants to be asked by their clients why they were not invested in the top stocks. It’s called window dressing – the best stocks are displayed in the shop window. And the best shares are in the major indices. So: bull market ahead.
Of course, it is quite possible that the bull run will be disrupted by external factors. An escalation in Ukraine or a big bang in the Middle East would encourage the bears again. So far, however, the conflict remains confined to Gaza, where the Israeli army is smoking out the Arab Waffen SS hideouts under hospitals, kindergartens and schools. Hezbollah and Iran are keeping a low profile so far. Nevertheless, you should of course keep an eye on the real-time news. Whether long or short – Bernstein Bank wishes you successful trades and investments!
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