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What's Driving the Current Rally?

The market's strong rally is predominantly due to one key factor: the significant drop in Treasury yields, leading to lower interest rates. This shift began to unfold in late October. On October 27, the S&P 500 was precariously close to falling below 4,117, threatening a further decline. This was in stark contrast to the situation just a week earlier, on October 19, when the 10-year Treasury yield had escalated above 5.00% for the first time in a decade, a key factor in driving stocks to a six-month low.

The turning point came with Federal Reserve official Chris Waller's remarks, suggesting an end to the Fed's rate hikes. This was a dramatic departure from the Fed's previous hawkish tone in September. The impact was immediate and profound: rates began to plummet, triggering a vigorous rally in the stock market.

The market quickly adjusted to not only the end of rate hikes but also began to factor in multiple rate cuts in 2024.

Waller's comments gained further momentum as they were echoed by other Fed officials, leading to a powerful surge in stock prices and a corresponding decline in Treasury yields.

The market's expectations for rate cuts evolved rapidly, initially forecasting two cuts in 2024, then increasing to three, and eventually to four. This growing anticipation of future rate cuts was so influential that it enabled the market to overlook several negative corporate earnings reports.

Then, on Wednesday, the Fed not only confirmed but exceeded market expectations for 2024 rate cuts. It indicated an additional cut beyond what was anticipated, effectively signaling the end of rate hikes and abandoning the previous "higher for longer" interest rate approach.

The market's reaction was immediate: Lower rates are good for stocks, so the market spiked following this dovish surprise as the market priced in even more rate cuts in 2024.

The market is now expecting six rate cuts in 2024, and the 10-year Treasury yield has dropped to its lowest since midsummer, a substantial drop from the October 19 peak.

Consequently, the S&P 500 has experienced a remarkable 14% return since the October 27 low.

In summary, the market's rally was unequivocally driven by the Fed's dovish pivot. By signaling the end of rate hikes and endorsing further rate cuts in 2024, the Fed effectively lowered bond yields, reversing the previous downturn and igniting a substantial rally.

Looking ahead, the continuation of this market rally hinges not on the Fed, but on economic data and earnings. The market has optimistically priced in the avoidance of a recession or slowdown, but this optimism could be premature. Any signs of economic weakening or missed expectations could quickly dampen the rally.

Similarly, corporate earnings are a critical factor. Despite recent underperformance, the market has overlooked this due to expectations of Fed rate cuts. However, if earnings begin to falter, it could pose a significant challenge at current valuations, and the Fed's influence would be limited in this scenario.

If economic data remains robust and earnings are stable, there's a strong likelihood that the stock rally will persist, potentially propelling the S&P 500 to new highs in early 2024.

However, this outcome is contingent on the forthcoming economic data and earnings, which will be the key determinants for the market as we enter the new year.

Money Illusion

The true sign that we are officially in a bull market is when the S&P 500 index makes new all time highs, adjusted for inflation. Currently, the index is still down 10% from its inflation-adjusted high. Lots of investors are being fooled by money illusion.


Looking through an intermarket lens, the behavior of small-caps is pivotal in confirming a genuine bull market.

Historically, at the start of bear markets, small-caps are first to fall before the larger, more capitalized indices.

In bull markets, small-caps, though often the last to rally, tend to eventually outperform their larger, more capitalized counterparts.

However, a close examination of the Russell 2000 small-cap index on the chart below over the past two years reveals a pattern within a well-defined range, rather than a clear upward trajectory. This raises questions about the strength and sustainability of the current market's trend.

Small-caps are at a critical juncture, positioned at the upper end of its range.

This positioning strongly suggests that we might witness another rejection.

However, if the Russell 2000 successfully breaks through its current level, it would be a confirmation of the bullish trend in equities.

On the flip side, a rejection at this point would indicate that the market's overall strength isn't as solid as perceived, signaling that there's more groundwork needed before a true bullish momentum can be established.

And remember - The one fact pertaining to all conditions is that they will change.

Feel free to use me as a sounding board.

Best regards,


Kurt S. Altrichter, CRPS®

Fiduciary Advisor | President

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