The stock market rally stalled last week as investors became worried about a potentially devastating report that could crash the stock market. A stock market crash awaits should the Consumer Price Index (CPI) inflation report come in as expected or worse. With the Federal Reserve hosting its bi-monthly FOMC meeting this week, investors will finally get a good understanding about whether or not the Fed will consider cutting interest rates anytime soon. But with stock market investors already pricing in Fed Rate cuts in March, any hawkish wording from Jerome Powell could cause the stock market to crash. This week’s stock market news could be the nail in the coffin that turns the stock market down, triggering a sell-off for the next two weeks, until the stock market bottoms out around Christmas in preparation for the annual Santa Claus Rally.
The stock market rallied in November, rising 11% in just five weeks. But now the stock market rally has stalled, and the main reason for that is because of this devastating report that has investors worried. I’m Stock Curry. I’m a former Merrill Lynch and Morgan Stanley investment banker. I’ve been investing for over 25 years. I preach about emotionless investing. And this report even has me worried.
The one reason why the stock market stalled when it did is because banks and hedge funds literally ran out of cash. They were unable to keep buying stocks. The speed of the rally appears to have overwhelmed the capacity of dealers balance sheets to expand quickly enough to accommodate the increase in the stock market. And while it’s unclear whether this demand for stocks is coming entirely from leveraged, that is margin, cash future basis trades, or simply cash positions, sophisticated traders that rely on leverage, that is margin, might opt to take their chips off the table, that is sell stocks, instead of letting their winning trades run into the end of the year.
If you’re wondering why the overall stock market has not hit new all time highs yet, it’s because back in January when the stock market was rallying, interest rates were still at 0%, meaning you could borrow on margin at around 2%, and then you could buy stocks, which were going up on average about 10% per year. It was a no brainer trade. Anybody would borrow at 2% in order to make 10%. It’s just free money. So back in 2021, everybody was buying stocks on margin because it was free money. You could just borrow money and make way more money by buying stocks. So margin was hugely effective back in 2021. And it’s what helped trigger the stock market to reach new all time highs.
But today margin is not cheap. With interest rates now running at over 5%, the cost for margin is now running around 8% or higher. Some brokers even have it as high as 10%. And with margin rates running 8% to 10%, it does not make sense to borrow at an 8% to 10% rate in order to maybe make 10% return on your investment. There’s no benefit in doing so. As a result, the number of people borrowing on margin has dropped significantly. In addition, those who are using margin to buy stocks are much more risk averse, meaning if they see a point where the stock market is topping out and it might go down, they’re far more likely to stop buying stocks on margin, and maybe even sell their stocks.
And that fear could already be impacting markets, as a rally in stocks has stalled, even as Treasury yields, which move inversely to bond prices, have continued to slide. So even though bond prices have continued to rise as investors buy bonds, the stock market has stalled as investors are very worried that the stock market just might not rise any further, or, more importantly, that it actually might fall. And this week’s Fed meeting could slam the brakes on a year end stock rally.
And if you’re wondering about that famous Santa Claus rally that normally causes stocks to rally in December, don’t forget that the Santa Claus rally does not start until December 25th, meaning we still have two weeks left where the stock market could crash before rising again at the end of the month. Also on top of that, it’s important to understand that the Santa Claus rally only happens 76% of the time, meaning 24% of the time stocks actually continue to fall.
And a potentially devastating report that’s being released this week could cause stocks to fall and possibly even crash. On Tuesday, the CPI, or Consumer Price Index for November is being released. Now normally the CPI report is no big deal. It might cause stocks to go up or down for a day or two, but by and large it’s generally ignored. However, this month’s CPI report that’s being released on Tuesday is a big deal. The reason is because the stock market is already pricing in perfection. The stock market is already pricing in inflation coming down. They’re already pricing in the Fed no longer raising interest rates. And most importantly, the market is actually pricing in the Fed cutting rates in March. So should any news come out that does not line up with the market’s current expectations of inflation coming down and the Fed cutting rates in March, this could have the effect of causing the stock market to crash.
Now headline CPI is expected to come in at 3%, which will be lower than the 3.2% in October. And while a continued decline in inflation should be good news for the stock market, the question is, will it be enough for the Federal Reserve as they announce their FOMC interest rate decision on Wednesday at 2 p.m.? And will it be enough for Federal Chair Jerome Powell to announce rate cuts at his meeting on Wednesday at 2:30 p.m.? What’s interesting about all this, and quite frankly, scary, is the fact that the stock market is actually pricing in a far better scenario than what reality appears to be showing.
Inflation expectations plunged in a closely watched University of Michigan survey. In the latest University of Michigan consumer sentiment survey that was released on Friday, the one year outlook for inflation rates slid to 3.1%, which was down sharply from 4.5% in November, and the lowest reading since March of 2021. However, it’s important to look at the fact that inflation expectations slid to 3.1%. Now wait a second. Headline CPI is supposed to come in at 3%. So how is it that headline CPI is supposed to come in at 3% this month, and yet consumer expectations are for inflation to be at 3.1% one year from now? Does that means inflation might rise?
It’s important to understand that the Federal Reserve does not use headline CPI in order to determine their policy rate. They use something called Core CPI, which removes the very volatile categories of energy and food. Removing those gives you a much more stable inflation rate, and that is expected to come in at 4% – double the Fed’s target of 2%. And with core CPI expected to come in at 4%, this helps explain why consumers only expect inflation to drop to 3.1% by the end of next year, and it also lends credibility to the fact that the Federal Reserve might come out far more hawkish than the stock market is currently pricing in, meaning the Federal Reserve could say some things on Wednesday that could absolutely crash the stock market should the CPI inflation report be as devastating as it’s expected to be with inflation still at 4%.
And keep in mind that good news for the economy is sometimes bad news for the stock market. On Friday, we got the US payroll data and it showed that the unemployment rate fell to 3.7%, with unemployment falling from 3.9% last month down to 3.7% in November. This is good news for the economy, but it’s actually bad news for the stock market. The reason is because with the economy being so strong, this actually has the downward problem of causing inflation to go back up with more and more people working. There’s more money in the economy, and that causes prices to rise. The Federal Reserve knows this, and that is why they’re far more likely to be hawkish at this next meeting rather than dovish, meaning they’re far more likely to talk about raising rates again rather than even considering the idea of cutting rates.
But ultimately what the market is currently pricing in, and what the stock market really wants to know is, when will the Fed start cutting rates, and by how much? Unfortunately for the stock market, Fed officials aren’t likely to entertain serious conversations about when to cut rates this week, and potentially not for several months unless the economy weakens more than expected. Should the economy weaken more than expected, that is enter a recession, that would actually be worse for the stock market than the good news of the Fed cutting rates. Still, the Fed doesn’t think rates need to remain at their current economically restrictive setting forever. The Fed will cut rates eventually, but if any news coming out of the Fed on Wednesday indicates that the Federal Reserve is not going to cut rates nearly as soon as the market is currently pricing in, it could cause stocks to crash. And it’s not just the Federal Reserve that has investors spooked.
Treasury Auctions also have Wall Street on edge. US Treasuries are a way for investors to buy US Government backed bonds where they can then earn an interest rate of around 5%, or in some cases a little bit less, around 4%. Now, if you want to earn that kind of cash and you don’t necessarily want to invest in bonds, and you want a far better and easier way of earning interest on your cash – let’s say you don’t want to invest in the stock market right now because you are worried about the stock market going down – then I highly recommend you just put your cash into a broker like Moomoo. Moomoo is paying you 5.1% interest on your cash right now. All you have to do is open an account using my link, deposit at least $100 in there, and you’re going to earn 5.1% interest on your cash. And putting your cash in a broker like Moomoo where you can earn 5.1% is probably better than buying stocks and bonds right now, because investors continue to be very worried about the US bond market.
For years, many in Washington and on Wall Street assumed that investors would buy any number of bonds the government issued, no matter what the fiscal outlook was. But testing that assumption is the sale of $20.8 trillion of new Treasuries just in the first 11 months of the year. That number is now set to surpass 2020 record of just under $21 trillion. That’s right. The US Government is now set to print more money this year than they did in 2020, and we all know that it was the printing of money in 2020 that caused inflation to skyrocket. With the US now printing more money than they did in 2020, what do you think is going to happen to inflation? Well, that is why investors are so worried about the CPI inflation report that’s coming out on Tuesday. And that is why investors are so worried, thinking that inflation might actually start rising again rather than falling. Should that also worry the Fed and cause them to raise rates again rather than cut them, we could see a major crash in the stock market.
Now, regardless of what happens in the stock market, I want to give you some free gifts. Every year around Christmas time, I have an annual Christmas giveaway where I give lucky winners free gifts. I mail them out to you in the US mail. All you have to do is register for our giveaways is scroll to the bottom of this page and click the “Sign Up for Giveaways” button. On December 19th at 19:00 Eastern Time – that’s 7 p.m. for you Americans – I am going to be hosting my annual live stream giveaway, where we’ll be talking about the future of this channel and giving you some free gifts. If you want to be one of the ten lucky winners this year, just scroll to the bottom of this page and click “Sign Up for Giveaways”.