Decisive Moment Arrives With $4 Trillion Stocks Rally at Stake

Investors are facing a pivotal week as a key measure of inflation that hits Tuesday and the Federal Reserve’s interest-rate decision on Wednesday are expected to set the tone for the stock market and economy heading into 2024.

Growing speculation that the Fed is done hiking rates and will start cutting by mid-year is fueling a sharp drop in Treasury yields and rekindling investors’ risk appetite. The S&P 500 Index has added roughly $4 trillion in market value since late October, as traders rush into beaten-down areas of the market like small caps, which typically benefit from falling borrowing costs.

“Stocks have been rallying on optimism the Fed is done raising rates,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. “The pricing has been rational considering how much the 10-year yields have dropped since mid-October. It seems like stocks will continue to grind higher as we enter 2024.”

That said, a closer look reveals concerns about the week ahead. A measure of expected volatility in the S&P 500 for the next five trading sessions is surging relative to the subsequent five days. At one point this week, the gap reached the widest since March for such a period, signaling rising demand to hedge against turbulence.

Vol Mismatch

Tuesday kicks off the one-two punch of crucial moments next week, with the release of November’s consumer price index. Signs of ebbing inflation could buoy shares into year-end by cementing expectations that the Fed will soon shift to easing. Consumer prices likely rose at a 3.1% annual pace, the lowest since June, according to a Bloomberg survey.