It was a solid week for the stock market, and wrapping it up Friday with another win was a plus. The major indices did very well for the week, with the Dow up 3.4%, the Nasdaq up 3.6% and the S&P 500 up 3.3%. This countered the previous week’s declines, and it has put investors in a good mood as we head toward Thanksgiving. Bulls like to count on Turkey Day rallies, and somehow and from somewhere, the rally appeared. There was just enough good news from the likes of Nike (NKE) and the broader economy to let us close out a tentative week to the upside.
The S&P 500 closed at 2,089. It puts it within striking distance of the 2,100 level, which has been a tough level to regain and hold all year long. The S&P 500 is now solidly above its 50-day moving average of 2,043 and its 200-day moving average of 2,039. It is bullish to see the 50-day moving average move back above the 200-day moving average, and that was a great way to close out the pre-Thanksgiving Day week. We should see the renewed optimism continue into the upcoming week, and as long as no new “global shocks” appear, investors might stay in its good mood until the end of the year.
The big question is whether the Federal Reserve will raise rates. It has telegraphed very strongly that a December rate hike is on the way. It has telegraphed a rate hike so strongly that the stock market seems ready, willing and able to absorb a quarter-point rate hike. Oddly enough, the stock market and investors expect a hike so much right now that if the Fed fails to raise rates in December, we could see a “tantrum” to the downside. Hats off to the Federal Reserve for baking in a rate hike nearly a month before it actually raises rates by a mere quarter point. Keep in mind that the quarter point would be from near zero short-term rates, so it should not have that big of an impact.
What troubles financial markets right now, however, is that the Fed might be raising rates precisely when the global economy is slowing down. Oil prices fell 2.8% on Friday, and that put the price of crude oil back below $40 per barrel. Commodity prices like copper are also down, which tends to signal global financial strain. Inflation worries are non-existent, and if anything, deflation is the bigger concern. The Fed seems intent on “normalizing” interest rates, though, and that might be a very smart and gutsy move. It might make sense for the Fed to become “pro-active” rather than “re-active,” as it has been over the past seven years.
A quarter-point rate hike would likely not rattle stock and bond markets (nor the economy), and we have already seen the yield on the U.S. 10-year yield rise. The Fed has a chance to reassert itself as an independent force, so we will just have to wait and see if it does so in December. This week’s lift in the stock market gives the Fed cover, and again, maybe we will see a stock market rally actually occur when the Fed raises rates. With the recent good news from the jobs report early this month and additional economic news this past week, the Fed does seem to have a “green light” for a rate hike.
It has been so long since the Fed has raised rates, though, that it is difficult to determine how financial markets will react. The best Fed move, according to most market strategists and Fed watchers, would be a rate hike on the condition that any more hikes would be gradual. The Fed has said that it would remain “data driven,” so a quick rate hike accompanied by comments of “measured and gradual” might work best. This would be the perfect scenario for a year-end stock market rally, so most bulls would not be complaining at all. The Santa Claus Rally could actually be on the way if the Fed can keep perceptions and sentiment in check.
We do need to keep seeing economic news come in positive, though, and the Fed knows that truth. Numbers have been supportive, and the last thing the Fed needs is to see deteriorating numbers heading into its meeting in late December. We shall see what happens, but for the time being, the Fed should be able to finally move towards its goal of the “normalization” of interest rates. This week’s vibrant stock market has given the Fed a “thumbs up” on a rate hike, and with the spirit of the holiday season in place, we really could see a year-end rally in the stock market.
The Gorilla wishes each and all a relaxing and restful weekend, and the Thanksgiving banana stuffing recipe is on the way. It has been an up and down and relatively flat year for stocks, but the setting is in place for a strong finish. We will be back in action on Monday, so have a great weekend!
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