A turbulent week on Wall Street ended with a “Thank Goolsbee, it’s Friday” rally, following Chicago Fed President Austan Goolsbee’s appearance on CNBC, which refocused investors’ attention on the still-encouraging trend in inflation and the likelihood that interest rates still have room to be trimmed. The S&P 500 surged 1.1% on Friday, thanks to a tame PCE inflation reading and a preconditions of a washed-out stock market.
Despite the rebound, the week’s volatility and reversals in some overheated assets were overdue and necessary to test the bull market against higher bond yields and a more foggy policy horizon. The market entered December on a high, with certainty about a favorable outlook, but strategists were caught off guard by the swift repricing of the Federal Reserve’s rate-setting path for next year.
Corrective action has reached certain groups, such as crypto and low-quality/high-beta speculative stocks, but a proper purge has not occurred. The divergences inside the market have reached brittleness, and the steady rise in Treasury yields alongside a rollover in the economic-surprise indexes made for an uneasy setup for Fed Chair Jerome Powell’s outlook.
While the reality check is not particularly worrisome, it’s a reminder that the current bull phase is not particularly mature, and the path to greatness is often jagged and jarring. The market will need to work through a period of policy uncertainty before it can refocus on possible policy opportunities. On a tactical basis, the S&P 500 retreated back to a check of levels seen the morning after Election Day and held there, and the Volatility Index chart now features a prominent peak and then broke.
