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  • Writer's pictureJade Rossback

Stocks Extend Winning Streak To 8 Weeks In A Row

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Stocks closed mostly higher on Friday. The star was the small-cap Russell 2000 index which led with a gain of 0.84%.

But all of the indexes were up for the week with the Dow, S&P, and Nasdaq making it 8 weeks in a row. The Russell 2000, and the mid-cap S&P 400 made it 6 weeks in a row.

Even though there's still 4 more trading days left in the year, we have a pretty good idea where they're going to end up. YTD the Dow is up 12.8%, the S&P is up 23.9%, the Nasdaq is up 43.3%, the Russell 2000 is up 15.5%, and the S&P 400 is up 14.7%.

The markets got another dose of good news last week with Friday's Personal Consumption Expenditures (PCE) index. That's the Fed's preferred inflation gauge. Headline inflation fell -0.1% m/m, which was in line with expectations, while the y/y rate fell to 2.6% vs. last month's downwardly revised 2.9% (from 3.0%), and views for 2.9%. The core rate (ex-food & energy), was up 0.1% m/m, which was less than expected, while the y/y rate declined to 3.2% vs. last month's downwardly revised 3.4% (from 3.5%), and the consensus for 3.4%.

Inflation continues to ease, giving the Fed plenty of room to cut interest rates next year. Prior to their last FOMC announcement, they had forecast they would cut rates 2 times (presumably by 25 basis points each). But at their latest announcement they estimated 3 rate cuts. Although, the market is expecting 4-5 cuts, and beginning earlier (March), than later (May).

These expected cuts aren't necessarily coming because of anticipated economic weakness, but instead because the spread between inflation and interest rates will have grown unnecessarily large, and potentially counterproductive.

The Fed expects PCE inflation, which is now at 3.2%, to fall into the 2's by mid-next year.

With rates at a midpoint of 5.38%, it's already 218 basis points above the current inflation levels.

If one were to assume that 100 basis points above inflation is the natural rate (aka the neutral rate), to allow growth, but keep inflation steady, then bringing rates down to 4.20% is where things should be now (which is -118 basis points below current levels).

Of course, 3.2% is still too high of an inflation rate. And the Fed still wants to make sure it doesn't go back up, hence the higher for longer mantra. But they also don't want to cause a recession either.

So if inflation keeps going down, can get into the 2's, and stay there for a while, rates should come down as well, and maybe even more than they're currently anticipating.

In other news on Friday, New Home Sales came in at 590,000 units (annualized) vs. last month's 672K and views for 690K.

The Durable Goods Orders report came in better than expected with New Orders up 5.4% m/m vs. the consensus for 2.4%. Ex-Transportation, it was up 0.5% vs. estimates for 0.2%. And Core Capital Goods were up 0.8% vs. expectations for 0.1%.

And Consumer Sentiment increased to 69.7 vs. last month's 69.4 and views for the same.

We have a shortened trading week this week. But that still leaves plenty of time for the so-called Santa Claus Rally to kick into gear (which technically extends into the first 2 trading days of the new year).

So even though Christmas is over, it might not be over yet for the markets.

*Content provided by Zacks Investment Research. An American company dedicated to the production of independent research and investment-related content. It was founded in 1978 by Len Zacks, based on his insights while pursuing his Ph.D. at MIT.

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