The Furious Bull Run on Wall Street Gets Reality Checked

The beginning of the week witnessed losses on Wall Street, indicating a potential reassessment of traders' aggressive anticipation of Federal Reserve interest-rate cuts. Both stocks and bonds experienced a downturn, suggesting that the prior fervent pricing of rate cuts may have been overly optimistic. This shift in sentiment comes amid a series of crucial job reports scheduled for the upcoming days, expected to provide insights into the Federal Reserve's future actions and potentially rekindle volatility, which has recently displayed signs of subdued activity.

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Analysts note that technically "overbought" conditions and extended market positions have rendered the markets more vulnerable following the impressive rallies in both equities and Treasuries observed last month. Tony Dwyer at Canaccord Genuity commented on the current state, stating that after the significant rally, the markets are now in a phase of relative calm, emphasizing that inflation is not a major concern for him as he continues to anticipate a recession.

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Contrasting views were presented by Morgan Stanley's Michael Wilson, foreseeing a turbulent end to the year for U.S. stocks. He predicts potential near-term volatility in both rates and equities in December, followed by more favorable seasonal trends in January. JPMorgan Chase & Co.'s Mislav Matejka expressed skepticism about markets expecting a soft landing, suggesting that a contrarian approach might be prudent.

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In recent market movements, the S&P 500 experienced a 1% decline, with the Nasdaq 100 underperforming due to a selloff in megacap stocks, notably Nvidia Corp. and Meta Platforms Inc., which declined by around 3%. Two-year U.S. yields increased by nine basis points to 4.63%, and the dollar strengthened. Meanwhile, Bitcoin surpassed $41,000 amidst heightened speculation in cryptocurrencies.

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Analysts are cautious, noting a substantial increase in interest rates that has yet to fully impact the economy. Dana D'Auria at Envestnet Inc. emphasized the possibility of a slowdown in the market next year, urging a balanced approach to investing.

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The prevailing market sentiment suggests an anticipation of lower interest rates, with approximately 125 basis points of easing priced in through next year's December Fed meeting. Goldman Sachs Group Inc. strategists cautioned that markets may be approaching the limits of plausible pricing without attaching material odds of a near-term recession.

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Chris Larkin at E*Trade from Morgan Stanley pointed out that the market may be exhibiting signs of complacency, as evidenced by the most-bullish stance in the bull-bear spread from the American Association of Individual Investors survey since July.

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As the year concludes, traders are grappling with the question of whether the market has become too complacent or if historical trends will prevail. While warnings about market overheating abound, traders seem to be adhering to the adage "don't fight the tape" in the final stretch of the year.

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Historical data suggests that December is unlikely to witness heavy selling, being the third-best month for the S&P 500 since 1950. Additionally, insights from previous corrections indicate that the market tends to experience a subsequent rise after emerging from corrections, although there is a historical pattern of declining once again after a period of growth.

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Looking ahead to 2024, analysts anticipate resolving lingering concerns, with expectations of an economic downturn that is manageable, a continued deceleration of inflation, and the potential for the Federal Reserve to signal rate cuts. Seema Shah at Principal Asset Management predicts improved economic conditions, fueled by a surge in sentiment and a significant influx of cash, amounting to a massive $5.7 trillion, to support a rally in risk assets. In broader markets, gold retreated from its record high, while oil declined for the third consecutive session amid skepticism about the effectiveness of the latest OPEC+ supply cuts.