After the stock market closed on Friday, Moody’s reduced the US government's credit rating from “stable” to “negative” citing large fiscal deficits. The ratings agency said in a statement that “continued political polarization” in Congress raises the risk that lawmakers will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability.” Will bond and stock prices tumble on Monday again as they did after Fitch Ratings downgraded US debt on August 1? We doubt it. We all know that fiscal policy is out of control.
The rallies in bond and stock prices since the start of November have been driven by perceptions that the Fed is done tightening, that inflation is continuing to moderate, that bond yields are high enough to attract sufficient demand, and that the soft-landing scenario is still the most likely economic outlo0k, for now. Furthermore, the global economy is weak, but not weak enough to cause a further drop in oil prices.
What about fiscal discipline in Washington? It ain't going to happen during an election year. So it remains a problem, but one for another day. Meanwhile, Treasury Secretary Janet Yellen demonstrated last Wednesday that she is willing to finance the deficits with more bills and fewer notes and bonds if that's what it takes to calm the bond market for now (chart).
The 7.2% rally in the S&P 500 since the October 27 low of the correction that started on July 31 quickly raised the index above its 50-dma and 200-dma (chart). It is likely to move higher and hit some resistance around 4550 as shown in the chart below. A move to our 4600 target by yearend could turn out to be a breakout move for early 2024.
We asked Joe Feshbach for his view of the market from a trading perspective: