Stocks were already partying into the Fed meeting (up ~12% over 6 weeks) – however when Powell provided his December update on monetary policy – he simply turned up the music. Risk was on. So here’s my question – with stocks up an incredible 15% in just 7 weeks – how much of next year’s potential gains have been pulled forward? Is it riskier now to buy stocks than it was a few weeks ago? To be clear, stocks are likely to add to their gains before the year is done – however we are now trading close to 20x next years earnings. That’s not a bargain.
Macro / Economy
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Cautious… But Invested
It’s a brave person who is short the market. Probabilities suggest we are headed higher in the near-term. For example, previous episodes of Fed pausing suggests stocks typically gain. My sentiment today is best described as ‘cautious… but invested’. To that end, one should always be invested to some extent. And whilst it’s always unwise to be completely remiss of the risks — it would be an even greater mistake not to have some exposure to higher quality risk assets and fixed income (at current yields)
Two Reasons the Fed Could Cut Rates
The latest set of economic numbers support a ‘goldilocks’ scenario for stocks. For example, durable goods orders continue to fall (a positive for inflation); and employment remains robust (a positive for growth). The question is what could cause the Fed to cut rates mid next year (given this is what is priced in)? I will offer two reasons… both of which I think are unlikely before June.