A Goldilocks Economy and a Santa Claus Rally Before the End of 2023? Can it Be?: Market Commentary from Cabana’s CEO – December 19, 2023  

4 months ago

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Stocks and bonds have been able to hold and even continue the rally that began in November. This has been true across a variety of sectors in the stock market as well as in fixed income of all duration. This is not just focused on big tech – and to me, that is the best news of all. Small caps, real estate, cyclicals and financials are leading the way after being left behind all year. The equal-weight S&P 500 (RSP) is outperforming its market-cap weighted brethren (SPY), and that is evidence of a rally with broad participation (see chart below). A broad-based rally is typically more resilient than a narrow rally.  

All of this comes on the back of a belief that the Federal Reserve (“the Fed”) is at the end of its rate hikes and will begin to cut rates next year as inflation continues to fall. What this should mean is that stocks and bonds will benefit from the Fed’s actions after two years of bonds and large swaths of the stock market being pummeled by it. Very good news indeed if this comes to fruition. The risk to this “Goldilocks Scenario” includes renewed inflation and a recession. To me, these are polar opposites. Inflation would rise if the economy remained “too hot”, and a recession would occur if the interest rate hikes to date have not been fully felt and the economy slumps. We have seen “experts” declare with certainty that one or the other was inevitable, but to date, it looks like we have somehow threaded the needle and the elusive soft-landing may be upon us (inflation moderated back to the 2% target without a recession).  

History suggests stocks and bonds do well in the year following a peak in interest rates and as the Fed begins to loosen policy. Add in a Presidential election year and the evidence is even more compelling. For those of you interested in these types of statistics, the Stock Trader’s Almanac is an incredible resource for historical data and has been published for many decades by the Hirsh family.  

Finally, another potential reason for holiday cheer is that we are in the middle of the month of December and a “Santa Claus Rally” is always a potential heading into a new year.  

At Cabana, we have transitioned from our Transitional Bearish Scene to our Transitional Bullish Scene and have reallocated accordingly.  

Key terms:  
A Goldilocks economy is not too hot or too cold but just right—to steal a line from the popular children’s story Goldilocks and the Three Bears. The term describes an ideal state for an economic system. (Source: Invetopedia.com)  
A Santa Claus rally is the tendency for the stock market to increase during the Christmas season. (Source: Investopedia.com)  

RSP v. SPY from 11/15/2023 – 12/18/2023 (Source: stockcharts.com)


January 17, 2024

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