The market experienced a slight setback on Wednesday, following a period of impressive gains. It was a day of selling, leading to the Dow Jones Industrial Average’s worst performance since March.
Santa Rally Continues
However, the Santa Rally is not yet cancelled. On Thursday, stocks are expected to rise once again, and the overall outlook remains positive.
A Surprising Turnaround
In the previous session, the Dow tumbled by 475 points, while the S&P 500 saw a significant drop of 1.5%. This sudden reversal came after seven consecutive weeks of gains for both indexes. Analysts are puzzled by the lack of an obvious catalyst for this downturn. Henry Allen, an analyst at Deutsche Bank, commented, “Maintaining that momentum was always likely to prove difficult.”
Examining the Reasons
Experts have identified several potential reasons for the midweek declines. Charalampos Pissouros, an analyst at broker XM, suggests that profit-taking or the purchase of put options for hedging purposes by portfolio and fund managers ahead of the Christmas holidays may have led to the correction in equity prices. In the world of derivatives, put options are used to bet on falling prices and can be employed as a hedge against more optimistic bets.
The Strong Stretch for Stocks Continues
There is little reason to doubt that the impressive run in the stock market will continue. Over the past two months, the market has seen significant gains due to the anticipation of decreasing inflation and slower economic growth, which have led to expectations of multiple interest rate cuts by the Federal Reserve in the coming year. So far, these expectations have remained intact.
Investors are preparing for a series of rate cuts, with a high likelihood that the Fed will initiate the process as early as March 2024, according to the CME FedWatch Tool. As long as economic data remains supportive (and there is an important inflation report due on Friday that could sway sentiment), the confidence in rate cuts should remain strong, providing further support to the stock market.
While some may argue that the market appears overextended and could experience a correction, the belief that the Fed will implement substantial rate cuts throughout the next year may keep investors confident and willing to increase their risk exposure once again. This sentiment is echoed by Pissouros.
As we approach the holiday season, there is still optimism for a Santa Claus Rally, a tradition where markets tend to rally towards the end of the year.
