Professor Siegel Weekly Commentary
Increased Signs the Fed Could Be Flexible
December 4, 2023
We had an incredibly strong November for the stock and bond markets and the technicals for the market look strong going into the new year—with the Dow within striking distance of making an all-time high—something I see over coming months. The primary risk that could knock us off course is a Federal Reserve that remains fixated on inflation fears. But there are increased signs the Fed will be flexible if there is a slowdown and moderation of inflation.
The current Powell Fed is not one that wants to surprise the markets. Powell gave a speech on Friday and, if he was looking to hike rates in December, he would have signaled that to the market. There will be no rate hike at the next meeting.
The data has started coming in soft. Not disastrous by any means, but weak. Current estimates of GDP for this quarter are 1.5-2%, and some estimates have gone lower. For the fourth quarter, let’s see how overall holiday sales evolve. There were good reports from Thanksgiving week specials, but December could turn softer.
The inflation data is all coming in at or slightly below expectations. Oil is staying down. All this data is feeding into a positive equity orientation.
Fed funds futures do not reflect any hikes this December and are starting to price in significant cuts for next year. Last Friday, the 2024 December futures were showing a rate of five cuts, but I always point out that is a biased estimate of pricing—as traders use these futures contracts to hedge bad scenarios which bid up their prices (and lower their yields). The rates pricing is more consistent with three to four cuts and some hedging/insurance premium.
If Powell shows he's flexible and will move on the downside, the equity markets can look past slow or zero growth in first and second quarter and we will have a good year in 2024. Outside of the tech sector, I think the market is still very defensively priced. We had a rally in small- and mid-caps but it has been muted so far.
When could we see the first cut? That depends on how weak the data come in and whether inflation continues to come down. One note of caution as you go into the new year and hear more talk of hikes or drops in the Fed funds rate will be after the release of the Dot Plot in December. Less than three months ago, at the September meeting, a majority of FOMC members believed there would be one more increase in rates by December. Now it's off the table. I suspect social media will be ablaze with comments at how hawkish the Dot Plot reads out. Just remember how good their own forecasting record has been.
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