Macro into Q4: Stocks and Gold Fly-Higher as the Fed Softens

Talking Points:

• It’s been a banner year for both gold and stocks as investors have been gearing up for the start of the Fed’s rate cut cycle
• While rate cutting cycles have shown a tendency to bring lower stock prices, that’s not a perfect relationship, and I explore that below

The rate cuts that have been driving markets for the better part of the past couple years have finally arrived; and as we come up on the two-year anniversary of the low in the S&P 500, there have been some massive moves in many asset classes that have largely been driven by and for that expectation of lower rates.

Perhaps the largest push point in a falling rate environment comes from the bond market. As short-term rates fall, oftentimes longer-term rates follow. And as Treasury yields fall, Treasury prices rise, and this presents an opportunity cost for investors in the marketplace. If you’re running a hedge fund and stocks have been ripping ahead of rate cuts and, suddenly, Treasury prices begin to fall, that can act as a deterrent from chasing stocks at stretched valuations as capital flows instead move into Treasuries.

This is why rate cut backdrops don’t always spell higher stock prices. But to be sure, there have been some instances in the past when the Fed has cut rates and stocks have continued to rise, pointing to the fact that there’s not always a direct correlation between rate cuts (or bond yields) and equities. So rather than blindly adhere to an expected causal relationship, I want to look at the matter from two very important segments of the market of gold and US equities.

US Equities: The Power of Pullbacks for Positioning

We’ve just completed writing our Q4 Forecasts and I’ve covered equities in this format for a while. I’ve retained a bullish outlook since last Q4’s open and that was a different backdrop at the time. This was right around when the 10-year note pushed up to 5%, and with that came a rocky and turbulent backdrop in stocks as the S&P dipped down to fresh yearly lows.

But, as I wrote then, my expectation was that US equities would show gains into the end of the year as the Fed started talking up possible rate cuts. That delivered at the November 1st rate decision and a strong bid developed that drove in and through the end of the year for the S&P 500.

For 2024 trade the challenge has been not chasing, especially at the Q2 and Q3 open. In those forecasts, I talked about the power of patience and waiting for a pullback before establishing bullish exposure. In Q2 that pullback arrived right near the quarterly open and in Q3, the pullback showed up in the middle of the quarter.

In both cases bulls jumped on the bid and re-took control of the matter, driving to fresh all-time-highs. And as I also wrote in the upcoming quarterly forecast, it makes little sense to me to be anything more than ‘tactically bearish’ if looking for weakness in equities.

It’s the Fed’s embrace of the wealth effect that has changed matters since the GFC. This doesn’t mean that stocks will always go up or that bear markets are an impossibility. But the fact that ‘stable’ equity markets are a priority at the Fed means that if we do see a nasty turn, the conversation can quickly turn back to softer policy and QE, as we’ve seen multiple times in the past 15 years.

So, for stocks, pullbacks can spell opportunity and that’s something that I’m tracking into 2025. For shorter-term approaches, there’s a zone of support potential from prior resistance, around 5618-5675. A little longer-term, there’s another key zone around the 5,400 level. And bigger picture, it’s the 5k psychological level that sticks out. I wouldn’t expect that latter level to come into the picture unless a bigger macro theme grasps markets’ attention, such as a spill in China or perhaps a more aggressive unwind in the Yen carry trade.

S&P 500 Weekly Price Chart

Chart prepared by James Stanley; data derived from Tradingview

Gold: Chasing Parabolas

It may be difficult to remember but as we came into 2024 gold prices were still struggling to gain acceptance above the $2,000 psychological level.

The metal had ranged for more than three years, even as the Fed was pedal-to-the-floor in late 2020 and 2021 gold just could not break above 2k.

Matters began to shift in Q1 of this year as 2k started to show as support; and then it was the rate decision in March where matters really began to shift as the Fed started to look convinced that the fight with inflation was nearing a point where they could cut rates. Gold went vertical at that point and, frankly, it hasn’t stopped.

As of this writing gold is overbought on the monthly, weekly, and daily charts, making the prospect of chasing the move-higher a daunting ordeal.

But there’s a very valid reason why this scenario is happening, in my opinion, and it points to that embrace of the wealth effect mentioned above. In short, the Fed has no interest in seeing equity markets fall if they can do anything about it and provided that their dual mandate is in relative check, there’s little rationale for the Fed to err on the side of easing.

Pullbacks in 2024 were relatively light, with a couple months of range (with an upward bias) in Q2 followed by a shallower pullback in Q3. Logically, at some point, longs are going to want to take profits and that’s where the matter gets more interesting from a strategy perspective.

Like my trepidation in chasing stocks in the above setup, I share a similar concern with gold given just how strong the move has been. As of this writing there hasn’t been much for support testing at prior short-term resistance of 2600, and that statement could even be spanned down to the 2500 psychological level.

Both areas remain points of possible support and higher-lows as we move into Q4.

Spot Gold Weekly Price Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Strategist for Forex.com

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