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Rates, Stocks - A Halloween Special

If you live around Melbourne's eastern suburbs, you may have attended "Halloween" at Greythorn Central in Balwyn last week. My two boys dressed up as Squid Game. Here they are, dressed up and ready to take your lollies - crazy kids. And no, they have not watched the series. You can thank Mr Beast for education.

What is it about fear - escape rooms, horror movies, haunted night tours, stock market predictions? We seem to gravitate toward them.


And right now, the investors' greatest fear is interest rates and where they may go from here. The market is currently pricing that the FOMC will start cutting rates in June of 2024. All me to let you in on a little secret. The market is almost always wrong about what the central bank will do next. The chart below plots the rates in the solid green line, and forecast rates at the time in the dotted green line. It truly is remarkable how wrong the market is with these things.

When rates are low, the market is systematically pricing that the Fed will soon hike. When rates are high, the market is systematically pricing that the Fed's next move will be to cut rates. Maybe the Fed will cut rates, maybe they won't. What we do know is that no one knows. Maybe we see rates sitting here, higher for longer.


Which leads me to my next investor fear - the stock market. We hear almost every narrative under the sun right now in relation to the stock market. Like interest rates, the direction of the stock market is anyone's guess. What we do know for certain is how the stock market typically performs during this time of the year - seasonality. In an average year, the stock market is flat from early July to late October with the second half of that period typically seeing declines. I touched on this in last week's note as we published our 3Q 2023 Financial Market's Handbook. Regardless of what the pundits tell us, on average, right now is when it all turns around and Santa starts to rev up his sleigh engine in preparation for the classic Santa rally.

Whether seasonality saves us again or whether there is something more structural behind the recent stock market declines, time will tell. But there is no denying that seasonality has a role to play in the stock market. Don't hate the player, hate the game.


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