Stock Market Update Tuesday December 24, 2024
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Are you prepared for 2025? Next year could be quite different from 2024, Currently, more stocks are hitting new 52-week lows than reaching new highs. Even though the market is saying "everything is fine," the strong performance of the Magnificent Seven has hidden some serious weaknesses beneath the surface recently.
Market Commentary on VIX and Fiscal Policy Impacts
The sharp decline of the VIX from 28 on December 18, 2024 to 15 today, Tuesday, December 24, 2024, signals a decisive shift towards a risk-on market sentiment. This nearly 50% drop not only reflects subdued volatility expectations but also marks a normalization of the VIX term structure. Such a shift often encourages greater investor confidence in equity markets and other higher-beta asset classes.
On the fiscal front, Friday December 20, 2024 saw Congress narrowly pass legislation to avoid a government shutdown. Notably absent from the bill was an adjustment to the debt ceiling—a contentious issue. Initially, President-elect Trump proposed removing the debt ceiling entirely to provide greater fiscal flexibility by eliminating the cap on Treasury issuance. However, bipartisan resistance, including over 30 House Republicans and all Democrats, blocked this provision, ensuring that the debt ceiling remains a political hot button heading into 2025.
Implications for Liquidity and Crypto Markets
The Treasury will reach the current debt ceiling by January 2, triggering the use of "extraordinary measures" to fulfill government obligations. These measures will draw from the Treasury General Account (TGA), a reserve fund currently holding roughly $800 billion. This reserve could sustain government funding needs through the summer, creating a temporary liquidity boost as these funds flow into the private sector.
From a market perspective, the redistribution of TGA reserves to the private sector enhances bank reserves, injecting liquidity into the financial system. This dynamic is particularly favorable for liquidity-sensitive assets, including cryptocurrencies, which could experience tailwinds in Q1.
While other factors, such as Federal Reserve policies and macroeconomic data, will also influence liquidity conditions, the combination of normalized VIX levels and anticipated TGA-driven liquidity injections sets the stage for a promising start to 2025, the year for risk assets.
Bottom Line:
Our analysis suggests that despite worries from the recent two-day pullback that started on December 18, 2024, market fundamentals and historical trends indicate a potential recovery. The Fed's dovish long-term outlook and the absence of a sell alert from our proprietary algorithm for the S&P 500 ETF SPY support this view. Quad witching conditions resemble those of previous late-year rallies. Moreover, with a cooling labor market and signs of moderating core inflation, there is a compelling case for continued strength in the equity market as the year ends. On 09/13/2024, the SPY and QQQ ETFs, our year-end outlook remains optimistic, supported by our proprietary algorithm and favorable liquidity conditions. Cash on the sidelines continues to accumulate, creating potential for a strong inflow into equities. China's PBOC has introduced significant monetary easing, adding further global stimulus.
