S&P 500 Rally Flashes Signs of Fatigue Near Record: Markets Wrap

(Bloomberg) — Stocks struggled to find solid ground after approaching a record on speculation the Federal Reserve will cut rates in 2024.

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With just a few days left before the end of the year — when volume tends to shrink — the S&P 500 wavered. While some traders cited an old Wall Street adage that says “never short a dull market,” concerns about a reality check have surfaced amid overbought levels and warnings about overly dovish Fed wagers.

Bets the Fed is done with its aggressive hiking cycle have fueled gains in both equities and bonds. The S&P 500 came close to its all-time high — a remarkable feat recently achieved by both the Nasdaq 100 and the Dow Jones Industrial Average that’s fueled a debate on whether investors should be worried or celebrating.

“Perhaps the most important question is: what has the S&P 500 done after it has climbed out of its hole?” said Ed Clissold at Ned Davis Research. “Did the rally to new highs leave the market overbought and in need of a correction? Or was it a breakout to a new up leg? History sides with the latter.”

The S&P 500 has outperformed its long-term average one-, three-, six-, and 12-months later, Clissold noted. The one-month returns are not quite as strong, suggesting a short-term overbought condition in some cases. One year later, the gauge has risen 13 out of 14 times by a median of 13.4%.

The S&P 500 traded about 0.5% away from its all-time high of 4,796.56. Treasury 10-year yields sank 10 basis points to 3.80% after a five-year sale stopped through, pricing at a lower yield than the when-issued yield. That followed Tuesday’s surprisingly solid two-year auction that drew buyers seeking to lock in higher yields before the Fed starts easing policy.

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Traders have stepped up bets on rate cuts as early as March 2024, according to Fed swaps pricing. That view has gained momentum since policymakers updated their forecasts this month to show they expect to reduce rates at a stronger pace than indicated in their previous projections.

“The ‘Santa rally’ has left many investors complacent,” said Tom Essaye, a former Merrill Lynch trader who founded The Sevens Report newsletter. “As we start 2024, markets will need to see new, positive catalysts to send the S&P 500 to new all-time highs.”

To Jose Torres at Interactive Brokers, optimism about the Fed having potentially won the war against inflation is excessive as data in coming months will likely persuade officials to delay rate cuts until May at the earliest.

“The stock market is too optimistic about the quantity of rate cuts expected in 2024,” said Michael Landsberg at Landsberg Bennett Private Wealth Management. “We expect to see three rate cuts in 2024 starting in July — and not any sooner than that — unless something unexpected happens in the economy that warrants lower interest rates.”

Now for many traders, the soft-landing scenario that investors see for next year may point to further gains in US stocks. But it also dims the prospect of another stretch of wild outperformance for the technology giants that dominated in 2023.

With added fuel from the artificial-intelligence boom, the group rose almost 100% through mid-July, compared with roughly 20% for the S&P 500. But as confidence in the economy grew after the Fed’s July interest-rate hike, which investors now see as the last of this cycle, the tech titans’ gains became more muted. Since the end of July, the group is up almost 7%, while the broad market has risen around 4%.

In corporate news, Apple Inc. won a court ruling temporarily pausing a US sales ban on its newest smartwatches, giving the company a reprieve in a patent fight that had forced the devices off the market and threatened an estimated $17 billion business. The New York Times Co. sued Microsoft Corp. and OpenAI Inc. for the use of content to help develop artificial intelligence services, in a sign of the increasingly fraught relationship between the media and a technology that could upend the news industry.

Traders also kept an eye on the latest geopolitical developments.

Oil retreated from its highest close in almost a month, with price support from attacks on the Red Sea faltering as key technical gauges flash weakness. Shipping giant Hapag-Lloyd AG said it will keep its vessels away from the Red Sea even after the launch of a US-led taskforce to protect the key trade route from militant attacks.

Elsewhere, Bitcoin recovered amid renewed speculation that the US securities regulator is getting close to approving an exchange-traded fund investing directly in the biggest token.

Key events this week:

• Japan industrial production, retail sales, Thursday

• US wholesale inventories, initial jobless claims, Thursday

• UK Nationwide house…