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The market mood is always changing. Just last week the market indexes were forging new all-time highs and cyclical stocks were the best performers. What a difference a week makes.

Here we are within weeks of the end of year and the end of a decade. It is approaching the 11th year of the recovery and bull market. The S&P 500 is up 25% in 2019 and very near the all-time high. Where do we go from here?

The overall market appears to be largely pricing in a continued trade war with China and a slowing global economy. It’s also pricing in a rate cut this month and more to follow. The indexes appear to want to forge higher provided trade frictions don’t get worse, the global economy doesn’t crash and the Fed comes through on the rate cuts.

The big news of last week was inflation data came in well above expectations on Thursday as the consumer price index (CPI) rose 7.5% year over year. This was the largest increase since 1982.
Shortly after, rumors of an emergency rate hike made the rounds on trading desks as the 10-year Treasury yield pierced the 2% mark for the first time in three years. Following this development, rate-sensitive sectors and growth stocks underperformed.

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We are in the midst of a rally that has continued for about two months. This market seems to want to go higher. While the rally has slowed significantly from the initial bounce off the lows in March, the overall market is still in an uptrend.

News of the spread from China of a brand new virus roiled markets earlier this week. Although the market has bounced back somewhat, I don’t think we’re out of the woods yet by a darn sight.

Aside from AI, a few other big-picture themes came into sharper focus for me this week.

All are positive for small caps.

First, economists and analysts are reducing their recession risk outlooks as the economy continues to hold up reasonably well. That’s good for small caps as they are more economically sensitive than mid and large caps.

Market leadership appears to be shifting. It’s interesting to note that utilities have been the top performing market sector over the past month and week.

Looking at the broad market we see that the S&P 500 is just 4% off its recent high, has thus far held above support around 2,800 and remains above its long-term (200-day) moving average line. The Nasdaq dipped to its May 13 low near 7,627, but it too is above its long-term moving average line.

It’s all about the Fed today. The woefully behind-the-curve Central Bank will announce another Fed Funds rate hike today. The increase is widely expected to be another 0.75%. But some worry it could be 1.00%.

The market’s hopes were dashed when August inflation was worse than expected. That means the Fed will have to continue to be hawkish and for a while longer. Plus, after four rate hikes so far, two straight quarters of GDP contraction, and a bear market; inflation isn’t budging yet.