Marketmind: An epic Santa rally

[December 22, 2023]  (Reuters) - A look at the day ahead in U.S. and global markets by Amanda Cooper.

It's the last day in the final full week of trading for the year - not a bad point at which to take stock of what 2023 has brought to equity investors. A recession that never was, a consumer that has proven almost bulletproof in the face of high inflation and interest rates, an unexpected boom in AI-linked stocks and, supercharging the market in the final weeks of the year, the anticipation of a steep drop off in borrowing costs in 2024.

Market watchers have been at pains to point out that much of the S&P 500's 24% gain this year has been due to the stellar performance of Big Tech - and the AI glitterati. But the equal-weighted S&P 500, which strips out the megacaps, is heading for a near 11% gain this year, most of which has come over November and December.

The S&P is heading for a 0.5% gain this week. This might look a bit flimsy as "Santa rallies" go, but it will mark the eighth straight week of gains for the index - the longest such stretch since late 2017. And there has never been this kind of momentum in the run-up to Santa's stock market boost before.

The longest string of weekly gains ahead of the Santa rally - gains in the week leading into Dec. 25 - was a five-week stretch in 2019.

Greasing the wheels of this rally is the biggest two-month drop in 10-year U.S. Treasury yields since 2008, which has created a theoretical sweet spot for stocks.

Inflation numbers later on Friday could give this year's Santa rally some extra sparkle, but they are unlikely to materially change the view that the Federal Reserve could cut interest rates down to 3.50-3.75% by the end of next year, from 5.25-5.50% right now.

RS/Brendan McDermid/File Photo

The core personal consumption expenditures index, the Fed's preferred measure of inflation, is expected to have risen at an annual rate of 3.3% in November and to have increased by just 0.2% on a month-on-month basis.

If the index comes in at a yearly 3.3%, this will be the lowest reading since April 2021, but still more than double where it was back in February that year, before core PCE began to skyrocket and above the Fed's 2% target.

The stock market appears content that inflation is under control. What is more in question is how much more can price pressures cool as a function of falling global energy costs, rather than as a function of burgeoning weakness in the economy. Even Santa can't hand out any crystal balls to answer that.

Key developments that should provide more direction to U.S. markets later on Friday:

* November personal consumption and expenditure index

* November building permits

* University of Michigan December final sentiment

* November new home sales

* November durable goods orders

(Reporting by Amanda Cooper; Editing by Susan Fenton)

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