The Dow set a new high

Today, Friday, the Fed’s favored inflation indicator the PCE or Personal Consumption Expenditures declined and is close to the Fed target of 2% so interest rates should continue to decline. We might have more evidence of inflation reduction next week, but we shall see.  The stock market, after a one-day large decline continues to move higher in an end of the year rally.

Last week the Fed did not disappoint markets. Chairman Powell held rates unchanged and suggested 3 rate cuts in 2024.  The Dow set a new high and other markets followed suit with significant rallies.  In addition, interest rates fell in anticipation of rate cuts next year.  Turns out the rumor in this case was accurate. The 2nd part is to sell the news. Well, that did not come true today but let's see what tomorrow brings.  

We are at tomorrow and the Dow set another record but the NASDAQ index declined.  The real action today was in value and mid and small cap indexes that soared.  Interest rates continue to decline based on the Fed meeting estimate of 3 interest rate deductions next year.  Markets are predicting 4 reductions.  

Market analyst predictions for next year a soft economic landing for 2024.  Last year markets thought a recession was a sure thing-didn’t happen.  The year before markets thought that big tech stocks were immune from interest rate increases-how did that turn out?  Markets are behaving like we are in a “Goldilocks” environment.  The convergence of lower interest rates, lots of cash and a growing economy as measured by GDP.  What could go wrong?  Well lot’s inflation, economic growth, consumer spending, debt levels, historically overvalued equity markets.  In addition, the market fear gauge, the VIX or volatility index has declined significantly indicating a complacent market.  Then there is the world at war to throw in another spoiler for the Goldilocks environment.  Right now the economic news fits neatly into the “Goldilocks” scenario.  Might this lead to Americans feeling better about the economy.  Human nature is very susceptible to the wealth effect.  Funn how this happens in an election year! 

The other side of the coin is predicting market and interest rates movements is problematic, but forecasting seems to be part of human nature.  

30-year mortgage rates declined below 7% for the first time since August.  It appears that they will continue their decline.  Refinancing volume is higher but new home mortgage demands are still sluggish. 10-year treasury rates are the benchmark for 30-year mortgage rates and the 10-year rate has fallen below 4% for the first time since late July.  

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