Making sense of the December market madness

The comments in effect endorsed rather than countered market bets that policy rates would be falling sharply next year.

Traders that were correctly positioned for the rally say Powell’s comments were neither surprising nor controversial: if the US inflation rate is annualising at 2 per cent, the Fed’s job is done.

Goldilocks

Job done means it does not have to tighten monetary policy further. And that means if the inflation rate is falling while the nominal cash rate isn’t, conditions are tightening.

Based on that logic, a lowering of the Fed funds rate may be required to avoid conditions from becoming tighter than intended.

If a fall in interest rates softens the blow for the US economy, and by extension the global economy, and that reduces the hit to corporate profits, there’s good reason for investors to be scrambling to buy stocks.

And when the market runs, fear of losing money turns into fear of underperformance adding fuel to the bidding frenzy.

There’s evidence of that in the Australian market with $8.85 billion of value traded in another big session. That suggests institutions are deploying their cash at size and speed, and that could sustain, or even accelerate, the rally.

What is encouraging is that the Powell-inspired run has been particularly beneficial to Australian sharemarket investors who have trailed in the US market’s dust.

The Australian dollar has fallen against the US dollar over the year, but is up 4 per cent over the month. The significance is that investors have been rewarded for investing in local stocks as a fair chunk of the gains in global shares have been reduced by the falling US dollar.

It’s also a sign that the market expects global growth to improve, and that’s driving commodity price expectations and broader sentiment.

Investors have been calling out that Australia’s sharemarket – which admittedly is highly exposed to resources – has traded more cheaply than the US. So it could be the place to be in 2024.

Naturally, some investors are questioning whether sentiment has swung too far, too quickly, and there’s no shortage of risks to worry about – be it war, elections and the chance central banks give inflation another look.

For now though, it seems foolish to fight the shift in sentiment. Brace for records to topple.