Stocks And Bonds Get A Boost From The Fed And The Treasury Department – Will The Santa Claus Rally Bring More Gains?

U.S. stocks rallied for another week on positive comments from the Federal Reserve and the Treasury Department on interest rates and the economy on the eve of the Santa Claus rally.

The gains were led by small caps, big technology and interest rate-sensitive stocks.

The S&P 500 closed at 4,719.19, up 2% for the week; the Dow Jones at 37,305.16, up 2.17%; the tech-heavy Nasdaq at 14,813.92, up 2.5% and the small-cap Russell 2000 at 1985.11, up 0.5.4%.

These gains came on top of the gains of the previous six weeks, with Nasdaq up 41.54% YTD, Russel 2000 up 10% and S&P 500 up 22.91% to another 20-month high.

The rally in equities was aided by higher bond prices, which drove yields lower for another week. The benchmark 10-year U.S. Treasury bond ended the week with a yield of 3.93%, down from 4.24% in the previous week and 4.93% a couple of months ago.

One of the drivers for last week's gains was comments from Federal Reserve Chairman Jerome Powell signaling the end of the current monetary cycle tightening and the preparation for pivot — interest rate cuts.

"The question of when will it become appropriate to begin dialing back the amount of policy restraint in place that begins to come into view, and is clearly a discussion topic of discussion out in the world and also of discussion for us at our meeting reading today," the central bank chief said.

"As widely expected, the Federal Reserve left interest rates unchanged at its December meeting," Dan North, senior economist with Allianz Trade Americas, told International Business Times. "However, the Fed's estimate of where the Fed Funds rate will be at the end of 2024 was marked down substantially from 5.1% at the September meeting to 4.6% now. That would imply three 25 bps cuts next year as opposed to the previous projection of just one cut."

"The Fed went against their own September projection of at least one more rate hike year, but the biggest thing is they acknowledged inflation is easing," added Sonu Varghese, global macro strategist at Carson Group. "FOMC members now project a core PCE of 3.2%, a big downward shift from the September estimate of 3.7%"

Jon Maier, chief investment officer at Global X, agrees. "The Federal Open Market Committee (FOMC) surprised by signaling a potential for three rate cuts in 2024 and even more in 2025 and beyond," he said. "The market is celebrating that the Fed dots moved closer to the markets.

Maier believes FOMC's policy change is a commendation for an economy that appears to be aligning with the Fed's long-term objectives.

Another positive for Wall Street was comments from U.S. Treasury Janet Yellen on Thursday that the U.S. economy is on a soft landing path. It's a situation of moderate economic growth and low inflation, which is favorable for both bonds and equities.

The dovish comments from the Fed chair and the reassuring words of a soft landing were music to the ears of traders and investors on Wall Street. They validated what they have been hoping for for both throughout the year.

And they came at a good time, on the eve of the Santa Claus rally, meaning that further gains may be ahead for equities in the next couple of weeks.

That's a term Wall Street uses to describe the strong performance in equities during the last week of December and the first week of the new year, driven by end-of-the-year bonuses followed by the beginning-of-the-year new money flows and a relaxed holiday atmosphere. They create a positive sentiment among retail traders and investors who tend to be more emotional than institutional investors chasing smaller speculative stocks.

And that could explain the lead of small-cap heavy Russell 2000 last week on Wall Street.