Newsletter

U.S. equity markets began the holiday‑shortened trading week on a firm footing. Broad gains in major indexes and the start of the Santa Claus rally marked this week. Following modest volatility in trading earlier in December, sentiment improved significantly as investors bet on year-end flows. As shown, the CNN Fear-Greed Index has moved materially higher from its readings earlier in the month.

The short answer appears to be"yes." However, it seems to be narrower, later, and more fragile than the headline mythology suggests. Importantly, the official "Santa Claus rally” window has not even started yet, as it is statistically measured as the last five trading days of the year plus the first two of January. Historically, that seven-session stretch has produced an average gain of about 1.3% and finishes positive “nearly 80% of the time,” according to data analysis from the long-running Stock Trader’s Almanac.

The Federal Reserve’s FOMC meeting this past week delivered a deeply dovish outcome for markets. The FOMC cut the federal funds rate by 25 basis points to a range of 3.50% to 3.75%. This marks the third consecutive rate reduction this year. While the vote was 9‑3, there was notable dissent on both sides of the policy debate. Three officials opposed any change, and one called for a larger cut. While unsurprising, it underscores the internal disagreement about the direction of the economy.

Markets opened in December with a surge in optimism as retail investors regained their "bullish spirit." That improvement continues to build on the bullish case we discussed last week:

Markets surged into the Thanksgiving holiday, ending the week with substantial gains across all major U.S. indexes. The S&P 500 rose by approximately 3.7%, marking one of its strongest weeks in the past six months. The catalyst was a combination of falling bond yields and increasing confidence that the Federal Reserve has completed its rate hikes. Currently, Kalshi (prediction market) is projecting an 80% chance of a rate cut in December.

The markets experienced another volatile trading week as we head into a shortened trading week due to the Thanksgiving holiday. The S&P 500 and Nasdaq both closed the week lower, but rallied on Friday as options expiration took hold. The consistent selling pressure in AI and semiconductor-related stocks had reversed previous overbought conditions enough for a bounce. The big news was Nvidia's earnings. Despite the market's poor reaction (a very normal response following its earnings report), the numbers were stellar.

This past week saw the most pronounced and coordinated rotation away from high-beta assets that we’ve experienced all year. What began as routine profit-taking in a handful of large-cap technology and AI names quickly evolved into a broad, organized risk-off event that stretched across the market. Mega-cap technology, which has been the driving force behind the market’s advance, fell sharply as momentum strategies encountered their first significant hurdle in months. But the pressure wasn’t isolated there: Bitcoin, small caps, unprofitable tech, and retail-favorite thematic ETFs all joined the selloff, confirming that this was not merely a sector wobble but a complete risk reset.

This past week, markets continued to digest earnings from key technology and AI-focused companies, as well as the lingering effects of the Federal Reserve’s recent policy shift. Despite a limited macroeconomic calendar due to the ongoing government shutdown, corporate results kept investors engaged. The market struggled with ongoing narrow breadth and growing sensitivity to forward guidance. Major earnings reports from AI-related and large-cap tech firms revealed continued strength in revenue and profit growth, but fell short of overly optimistic expectations.

This week, the Federal Reserve acted as expected, cutting its benchmark interest rate by 25 basis points on Wednesday to a target range of 3.75% to 4.00%. Alongside the cut, the Fed announced a halt to its balance sheet runoff, effectively ending quantitative tightening (QT). Both moves were significant shifts away from policy restraint toward support, the subject of this week's newsletter.