Fed's Dovish Pivot Fuels Euphoria But Hard Landing Still Lies Ahead

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Brian Evans and Sarah Min report Dow, Nasdaq close higher Friday, extending rally to a seventh winning week:

The Dow Jones Industrial Average closed higher Friday after a whipsaw session, where it marked a fresh intraday record, while the tech-heavy Nasdaq-100 closed at a record high, as Wall Street pushed both major indexes to their seventh-straight winning week.

The Dow closed up 56 points, or 0.2%, at 37,305.16. The S&P 500 slipped 36 points, or 0.01%, to 4,719.19 while the Nasdaq Composite closed up 52 points, or 0.4% at 14,813.92. The Nasdaq-100 ended Friday at 16,623.45, topping its previous record dating back to November 2021.

Shares of Costco closed up 4.5% after hitting an all-time high during the session. The retailer surpassed Wall Street’s estimates for quarterly results and issued a dividend of $15 per share.

Both the 30-stock Dow and the tech-heavy Nasdaq notched their seventh straight positive week. As of Friday, the Dow is higher on the month by 3.8%. The S&P 500 is up by 3.3%, while the Nasdaq Composite has climbed 4.1% so far in December.

The S&P 500 marked its longest winning streak since 2017, and could still soon join the Dow with its own all-time high. The broad market index is less than 2% away from that mark, which was set in January 2022.

Wall Street rallied this week after the Federal Reserve on Wednesday admitted that its efforts to tamp down inflation are taking hold, and indicated three interest rate cuts are coming in 2024, buoying investor sentiment. The November retail sales data that came in stronger than expected on Thursday, following this week’s cooler inflation readings, added to hopes the Federal Reserve could navigate a soft landing.

That said, New York Fed President John Williams pushed back on the euphoria around the central bank easing rates next year. “We aren’t really talking about rate cuts right now,” Williams told CNBC’s Steve Liesman in an interview on Friday.

“Stocks got a major sentiment boost from Wednesday’s Fed meeting, but that immediate effect was bound to wear off,” said Chris Larkin, managing director of trading and investing at E-Trade. “The market doesn’t go up every day, no matter how strong a trend is. Pullbacks and pauses are inevitable, regardless of how big they are or how long they last.”

It's Friday and this week was a big week because earlier this week, the Fed signaled that it would cut interest rates three times next year as it predicted inflation would cool.

That was enough to send bonds and stocks rallying hard this week:

Of course, all this excitement and FOMO which sent stocks soaring this week has led to a lot of overbought stocks in the market:

And complacency has set in with the CBOE Volatility Index (VIX) hitting a new 52-week low and multi-year low today:


So, while the bulls are rejoicing about the Fed's dovish tilt, it's safe to say that stocks have priced in the coming rate cuts and a lot of good news.

Doesn't mean they can't go higher, especially if the seasonal January effect kicks in, it just means they've already rallied hard and one thing they have not priced in is a hard landing.

Indeed, there is very little precedent and plenty of reasons to worry about the US economy as we head into year-end:

And in credit markets, there is plenty to worry about too:

Not to mention deflation out of China and world debt exploding to levels we haven't seen before:

But nobody seems to care as the pain trade remains up, even on homebuilders which are way overbought:

We will see if 2024 is the year of reversion to the mean, or reversion to sanity, but right now these markets are all about the Fed's dovish pivot, FOMO and chasing returns to close out year.

Lastly, some bond managers are worried about the sharp drop in bond yields.

DoubleLine CEO Jeffrey Gundlach thinks a 'fire alarm' is going off in the economy as Treasury yields break below a key level:

The 10-year yield's plummet below 4% on Thursday triggered an alarm that billionaire bond investor Jeffrey Gundlach warned about earlier.

After the Federal Reserve signaled Wednesday that it may be cut interest rates three times next year, the 10-year Treasury rate tumbled more than 17 basis points to just above 4%.

"There's something about if you break below four on the 10-year that I think it almost sounds like a fire alarm going off relative to the economy," the DoubleLine founder said in a Wednesday CNBC interview.

Since his remarks, the rate has since fallen nearly 13 basis points, standing at 3.9% as of Thursday afternoon.

Meanwhile, he expects the 10-year to fall much further into the "low threes" in 2024, as he sees a recession setting in sometime next year.

As the economy slows, Gundlach predicted the Fed would slash the fed funds rate by 200 basis points, far more than the 75 basis points Fed officials telegraphed in their "dot plot" of projections for 2024.

Once the 4% threshold is ruptured, investors should expect the correlation between strong bonds and strong equities to come apart, he added.

For 2024, Gundlach advocated that investors stick to long-dated bonds, suggesting to switch from short-dated T-bills to long-duration Treasurys once a recession hits.

"I think the logic that people have that money market bloat is going to go into the stock market is wrong. I think it's unlikely for investors to go from risk-free 6 month T-bills to the 'Magnificent Seven' at massive P/Es and all-time highs on the Dow Jones adjusters," he said. "I think they're much more likely to go from their mountain of cash in T-bills into bonds."

He makes a good point, in a recession, it's bonds rather than stocks that will benefit from the mountain of cash sitting on the sidelines, but others disagree:

Anyway, it's Friday, Christmas and the new year are around the corner, people are opening their 401 (k)s seeing their balance has risen nicely, it's time to sit back, enjoy the holidays and be thankful.

The only thing I want people to understand is euphoria can easily end in tears, so don't get caught up in the nonsense and keep a level head here as the worst in the economy lies straight ahead.

Below, earlier this week, Mad Money' host Jim Cramer talked about the Fed's dovish pivot and how its impacting stocks.

Cramer is my favorite contrarian indicator so when he says a recession isn't coming, it's coming or already here.

Next, Tom Lee, Fundstrat Global Advisors co-founder, joined 'Closing Bell Overtime' yesterday to talk the market action as the Dow notched a new record high. Lee thinks small caps can rally 50% from these levels (not if a recession hits us).

Fourth, Advisors Capital Management Partner and Portfolio Manager JoAnne Feeney talks about how the latest Federal Reserve decision to keep interest rates steady is impacting markets and growth stocks. She rightly warns to beware of the Magnificent 7 stocks.

Lastly, DoubleLine CEO Jeffrey Gundlach joined 'Closing Bell' earlier this week to discuss Fed Chair Powell's statements and the market reaction.

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