THE MACRO SETUP OVERVIEW:
- US stocks have resumed their trek to and through all-time highs
- A taper announcement is widely expected for this week's Fed meeting
- The month of November is typically a strong period for US stocks – the strongest month of the year in the QE era, in fact
All-Time Highs in Stocks Means…
In this week’s edition of The Macro Setup, we talked about the rally by US equities to all-time highs, including the potential outperformance of small caps over large caps after the Russell 2000 traded sideways for most of 2021. With Guy Adami out on vacation, Dan Nathan was joined by Chris Verrone, partner at Strategas, who was just ranked as the number two technical analyst on Wall Street in the annual Institutional Investor All America Research Survey.
The month of November is typically a strong period for US stocks – the strongest month of the year in the QE era, in fact – and longer-term data suggests that when markets have performed as well as they have in the first ten months of the year, November and December produce more gains as well. Stock market breadth is improving, meaning its not just the big names (for example, AAPL and MSFT) that are powering the indexes higher.
The middle of the week presents a potential wrinkle, however, when the Federal Reserve gathers for its November policy meeting. It is widely anticipated that the Fed will announce it will begin tapering asset purchases, a shift in policy that has been telegraphed well in advance for the past few months. Nevertheless, even as the Fed tapers into 2022, it will still expand its balance sheet by roughly another $500 billion – providing ample stimulus for markets.
Given that rates markets are ahead of the curve on the Fed taper announcement – five 25-bps rate hikes are discounted through the end of 2023, and there is greater than a 60% chance that the Fed hikes begin in June 2022 – it may be the case that the US Dollar is ‘priced to perfection’ – that is, it will be difficult for the Fed to yield a hawkish surprise that could spark a significant greenback rally.
*For commentary from Dan Nathan, Chris Verrone, and myself on the US Dollar (via the DXY Index), the US S&P 500, gold prices, Bitcoin, among others, please watch the video embedded at the top of this article.
CHARTS OF THE WEEK
Eurodollar Futures Contract Spread (NOVEMBER 2021-DECEMBER 2023) [BLUE], US 2s5s10s Butterfly [ORANGE], DXY Index [WHITE]: 4-hour Chart (MAY 2021 to NOVEMBER 2021) (Chart 1)
GOLD PRICE TECHNICAL ANALYSIS: DAILY CHART (MAY 2020 TO NOVEMBER 2021) (CHART 2)
GBP/USD RATE TECHNICAL ANALYSIS: DAILY CHART (MARCH 2021 TO NOVEMBER 2021) (CHART 3)
--- Written by Christopher Vecchio, CFA, Senior Strategist
