Things you need to know.

–         The British Are Coming, The British Are Coming…or are they?

–         Williams and Mester both PUSH BACK on expected rate cuts as they try to temper the mood.

–         Oil continues to struggle; US production stuns the Saudi’s so – What’s next?

–         Gold digesting the latest narrative…. It remains in the $1990/$2050.

–         Try the Simple Blanched Broccoli

So, while the stock market rally stalled on Friday – they did end the week higher….as investors, traders and algo’s are convinced that the rate cuts are coming….it reminds me of the famous Paul Revere ride on April 18th, 1775 when Dr. Joseph Warren (think JJ) sent him on The Midnight Ride – from Boston to Lexington, MA to announce that “the British were coming, The British were coming…” (think lower rates are coming, lower rates are coming) to arrest Samuel Adams and John Hancock (think algo’s)– yet it was later learned that that intelligence was ‘faulty’ that in fact the British had no orders to arrest anyone (think the latest Johnny Williams- NY Fed President comments)– but they were very much on the move out of Boston (think peak rates)…..You get the picture, don’t you?  You can google the rest in the event they never taught you this in 6th grade….

In any event stocks ended the week mixed – the Dow was up 56 pts or 0.15%, the S&P lost less than 1 pt, the Nasdaq gained 52 pts or 0.35%, the Russell lost 15 pts, the Transports added 100 pts and the SPW (equal weight) lost 43 pts.

So, a couple of things here…JJ’s comments last week seemed to suggest that the FOMC committee went from NOT considering any rate cuts (5 weeks ago) to ‘we are now considering rates cuts’  and that sent the algo’ and traders into a renewed frenzy – and broad mkt rally – on top of the frenzy that was created at the end of October when the narrative started to change…leaving traders to price in ‘at least’ 5 rate cuts in 2024…..2 more than the 3 cuts that appeared to be the in the forecast! Thus, the excitement….

Bonds were little changed on Friday after plunging earlier in the week – with the 10 yr. yield settling in at 3.89%,  down over 1 full percentage point since late October – which means that borrowing costs are LOWER and financial conditions are EASIER….leaving me to ask – if that’s the case – then why does the FED need to do anything….the market is already doing the work……Which then leads us to what happened next……

So then on Friday – after members of the FED saw the reaction to his comments – they tried to ‘walk it back’ just a bit…. sending NY Fed President Johnny Williams out on the media circuit – telling investors in a CNBC interview that

“We aren’t REALLY talking about rate cuts right now. I think it’s just premature to be even thinking about that!” 

Well, isn’t’ that a kick in the pants! They aren’t REALLY talking about it.  Premature?  (Do you think?) – which then leaves me and everyone else to ask – Then what exactly did JJ say?    Seems to me that Johnny’s ‘Dot’ on the Dot Plot wasn’t on the side of a cut – so 1 down and 11 to go…..as we try to figure out which members of the FED thinks a rate cut is appropriate….Remember – the dot plot is just a summary view of the members and not an OFFICIAL Fed position…..Yet – so many are now conditioned to pay attention to the exact position of every dot…It’s comical really – they create this graph, they show everyone, then JJ comes out and confirms what the dots supposedly reveal, then when markets overreact (in this case further to the upside) – they come out and say – ‘welllllllll, not really….’ (Notice the exaggeration….)

Look – they keep telling us that the economic growth is still too strong, unemployment is still at ‘historic lows’, earnings are expected to grow by double digits next year, we are in for a soft landing, and prices for everyday items are coming down (which isn’t really true, some are, but others are not – ) they aren’t just going up as fast as they were and remain ~20% higher today than they were 2 years ago. – But it is what it is and 2024 is a Presidential election year….

Eco data on Friday was mixed – Empire Manufacturing, Industrial Production, Capacity Utilization, Manufacturing Production and PMI all just a touch weaker, while Services PMI was a bit stronger…. reminding us that the US economy is a 75% services economy….

There is no eco data today that anyone needs to be concerned about, but later in the week we will get Housing Starts, Building Permits (both expected to be weaker), Mortgage Apps, Existing Home Sales, Conference Board Consumer Confidence numbers, GDP, Core PCE, the PCE Deflator and Personal Income and Real Personal Spending (which is good that they are giving us a REAL number and not a fake number – don’t you think?)

Remember – most of that data comes out on Thursday and Friday – which is right before the Christmas celebrations….remember – the next two Monday’s are holidays – so, a lot of people will not be in the office towards the end of this week…so expect the algo’s to take control – because the algo’s don’t celebrate Christmas…which means we could see exaggerated moves in either direction – depending  on what the algo interpretations are……which also means that asset managers/portfolio managers will place GTC (good til cancelled) buy orders below the market and GTC sell orders above the market – to take advantage of those exaggerated moves (if they happen) while they are away from their desks…..

I continue to urge caution – meaning don’t get caught up in the euphoria of it all…..do not get sidelined, do not go off the rails – thinking that you ‘missed it’….….the market action has been strong and while I love the fact that stocks are up (portfolios are up) – I am not convinced that the Goldilocks narrative is going to play out the way the market is suggesting…..My fear is that this sharp rally is just setting us up for disappointment – at least in the early part of 2024.  Everyone is saying – that there is so much money on the sidelines (in cash or cash equivalents) that was earning more than 5%,  but, when rates get cut – this money will be looking for better returns – thus the rally…..So, I ask – what happens if the FED doesn’t cut, what happens if inflation remains ‘sticky’ what happens if Johnny is right – It IS premature to be talking about rate cuts…Just something to consider….Not something to make you completely change your plan….Just food for thought.

US futures this morning is apparently tossing Johnny’s comments aside…. Futures are up, but they were up a bit more…at 8 am Dow futures +60, S&P’s +7, Nasdaq +19 and the Russell is up 6.   The CME FedWatch Tool has cooled a bit – those March cuts that they have been screaming about are no longer 100% guaranteed……….cuts (if they happen sooner) are now expected to begin in May – which would be 6 months ahead of the election – which will also wreak of political interference….Remember – the FED is NOT supposed to change monetary policy during an election year UNLESS something has broken….otherwise it becomes suspect…..So the question now is – What is the FED going to do?  Oh, it’s a tangled web we weave….!

This morning Cleveland Fed President Loretta Mester is now joining NY” s Johnny Williams – saying that the markets are overreacting to JJ’ s comments last week as she too tries to walk it back – So, I guess that she is number 2 of the members that remain a bit more hawkish.  …. Expect to hear from Austan Goolsbee (Chicago Fed President) this morning at 8 am and I suspect that he will try to temper the market’s reaction but will suggest that cuts are coming as he tends to be more dovish than hawkish….

Oil – rose on Friday and was up over 1% overnight after Russia reported that they will cut exports by 50k bpd or more as they too try to control prices and the ‘Hooties’ (actually spelled – Houthi’s – the Iranian back terrorist group in Yemen) attacked oil ships on the Red Sea…..and this is raising concerns over supply disruptions… In addition – bad weather across Russia – which prevented loading oil onto ships and scheduled maintenance that shut down production only added to that short term story.

This morning though, as the sun moves across the sky- we see oil down 50 cts at $70.90/barrel.  This due to a Bloomberg headline that details how US shale ‘surprise production surge’ poses a threat to OPEC.  The article goes on to say that ‘drillers from the Permian Basin in West TX to the Bakken Shale of North Dakota have ramped up production well beyond what analysts foresaw, pushing output to a record just as OPEC and its allies put the brakes on supplies in a bid to arrest price declines.  Which now leaves us to ask – what will OPEC do now?  Will they turn up production to force prices lower – to punish the US producers as prices fall below breakeven or will they cut production even further to hopefully stabilize oil prices?  Just a note – prices would have to fall below $50/barrel to cause the US producers to breach breakeven and slow production – but remember – oil is also a national security issue – so our reliance on ourselves is tantamount to security.

Gold which tested support at the trendline at $1990…. rallied back to $2050 is now digesting all of that and is down $2 at $2,033.  The ongoing drama out of the FED will drive the price of gold in the short term…. any talk of holding rates will aloo gold to stabilize while talk of rate cuts will send gold lower….

The VIX continues to trade at all-time lows…..$12.60…..and this is only helping stocks go higher ……because a VIX at $12.60 suggests ongoing complacency….think NO FEAR…..and so money continues to be put into the market with more aggressive instructions vs. passive instructions….thus higher prices – because buyers are willing to ‘take offers’ (aggressive) rather than let sellers ‘hit the bid’ (passive).  The VIXY etf continues to weaken as the VIX weakens….but remains a  cheap insurance policy for those that think they want some….Remember – if we get a change in the narrative (and we will) and the VIX spikes higher, stocks will decline and the VIXY will rise…the only issue is – When will the narrative change?

European markets are marching lower….…. we will get 2 ECB speeches today….one from Izzy Schnabel and the other from Phil Lan – both voting members….so lets’ see what they have to say. Recall that last week the ECB left rates unchanged but did revise growth and inflation downward…. they also did announce plans to shrink the balance sheet but Christine Lagarde – ECB President did push back on ‘substantial rate cuts in 2024’.  In Germany – the IFO business index came in below forecast at 86.4 and below last month’s 87.2.  Markets across the zone are mostly lower by 0.3%…. only the UK is positive, and they are up 0.6%.  Remember – the UK is not governed by the ECB – so their decision will not directly affect the UK.

The S&P closed at 4719 on Friday……and even as the FED tries to talk back the excitement.  The action this morning suggests that the tone may be settling down…. but it also is due to the coming holiday shortened week and holiday vacations…. Let’s see who else comes out of the woodwork to counter JJ’s latest commentary….as they try  to control creating an even bigger asset bubble….because part of all this – does feel like a bubble….but remember – the market (traders & algo’s) can remain irrational for a long time….and that tends to draw in the retail investor at exactly the wrong time…which is why I keep telling you – investing is NOT trying pick tops and bottoms, but rather staying in the game – taking advantage of the cycles – trimming a little in the big movers when it gets toppy, and adding a lot when it gets ‘troughy’.  The point is to build a solid, diversified portfolio that can and will ride the waves…… Talk to your advisor…build that plan…. stay focused on the end game.

If you are invested – you’re good, if you have more money to put to work, be patient – don’t chase anything, let it come to you…. and if you are just starting out – understand you risk profile, know where you are in the life cycle…. Call me to discuss.  212-381-6194.

Take good care.

kpolcari@slatestone.com

Sources:  Bloomberg, CNBC, Reuters, Wall Street Journal

Disclosure: The content provided in this material is designed for educational and informational purposes only, and it is important to note that it does not constitute personalized recommendations. This commentary is not nor is it intended to be relied upon as authoritative or taken in substitution for the exercise of judgment.  The comments noted herein should not be construed as an offer to sell or the solicitation of an offer to buy or sell any financial product, or an official statement or endorsement of Kenny Polcari or SlateStone Wealth.

The market commentary is the opinion of the author and is based on decades of industry and market experience; however, no guarantee is made or implied with respect to these opinions, which may not necessarily align with our firm’s standpoint.

While considerable effort has been invested to ensure the accuracy and dependability of the information presented, we must clarify that we cannot guarantee the accuracy of third-party information. Our usual sources for third-party data include channels such as Bloomberg.

Kenny Polcari is the Chief Market Strategist for SlateStone Wealth.  Neither Kenny nor the partners of SlateStone Wealth are compensated in any manner by the issuers of any securities mentioned in the publication.

Steamed Broccoli dressed in olive oil and fresh lemon juice.

This is a simple side dish, but a staple on the Christmas eve buffet table…. It is just as it sounds. 

Blanche the broccoli just enough to leave it crunchy.  Strain, season with s&p, and dress with a splash of olive oil and fresh lemon juice. 

It’s about the simplicity – because there is so much going on with the 7 Fishes! 

Buon Appetito.