Stocks and Crypto Could Rally Through Year-end, but Watch for This Last Wild Card

As we approach the end of the year, investors are eagerly anticipating a potential rally in stocks and cryptocurrencies. Lower interest rates, declining inflation, and higher corporate profits have created a supportive environment for risk assets. However, there's one last wild card that could upset expectations for a Federal Reserve interest rate cut in December: the November consumer price index (CPI) data.

The CPI is a key indicator of inflation, and the Fed's decision on interest rates is heavily influenced by inflation trends. If the CPI data surprises to the upside, Treasury yields are likely to rise, and value stocks are likely to drop. However, the decline would likely be substantially offset by a rotation into technology and growth stocks. The Fed is expected to deliver a quarter percentage point interest rate cut for its December meeting, which could power the U.S. stock market rally through the year-end.

Corporate profits will play a significant role in driving the potential rally of stocks and crypto through year-end. As noted by Thomas Hainlin, senior investment strategist at U.S. Bank Asset Management Group, the supportive environment for risk assets, such as stocks and cryptocurrencies, is due to the combination of lower interest rates, declining inflation, and higher corporate profits. This positive outlook is further bolstered by the strong November jobs report, which added 227,000 jobs, exceeding expectations. With corporate profits expected to remain robust, investors can anticipate a continued rally in stocks and crypto through the end of the year.

The regulatory environment for cryptocurrencies, particularly under a Trump administration, could significantly impact their performance in the coming months. Historically, Trump has been critical of cryptocurrencies, viewing them as unregulated and potentially dangerous. However, his administration has not taken concrete steps to ban or heavily regulate them. If Trump's stance softens, or if his administration implements clear, pro-crypto regulations, it could boost investor confidence and drive a rally in cryptocurrencies. Conversely, if the administration tightens regulations or expresses strong anti-crypto sentiments, it could lead to a sell-off. Market participants should closely monitor the administration's stance on cryptocurrencies to anticipate potential price movements.

The recent strength in the U.S. labor market and jobs data could have a significant impact on the rally of stocks and crypto. The November jobs report showed a stronger-than-expected increase in employment, with the economy adding 227,000 jobs. This data suggests a robust economy, which could boost investor confidence and drive further gains in the stock market. Additionally, the strong jobs data may influence the Fed's decision on interest rates, as it could indicate a need for a more cautious approach to rate cuts. If the Fed decides to hold off on rate cuts, this could lead to a pullback in the rally of stocks and crypto, as lower interest rates typically support risk assets. However, if the Fed proceeds with rate cuts despite the strong jobs data, this could further fuel the rally in stocks and crypto.

In conclusion, the November CPI data is a crucial wild card for investors, as it could influence the Fed's decision on interest rates and, consequently, investor sentiment towards risk assets like stocks and cryptocurrencies. A surprise jump in labor-intensive services prices could give the Fed pause, potentially leading to a delay in rate cuts and a sell-off in value stocks. However, a rotation into technology and growth stocks could offset this decline. Market participants should closely monitor the CPI data and other economic indicators to make informed investment decisions as we approach the end of the year.