Is this the start of an ASX 200 Santa rally?

It's been a good time for the share market in recent weeks. Will this be an early Christmas present?

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Key points
  • ASX 200 shares are rising after indications that big US interest rate increases may be over
  • Expert Stephen Innes believes this could be part of a Santa rally for the share market
  • However, Fed boss Powell said interest rates could stay high "for some time"

The S&P/ASX 200 Index (ASX: XJO) is currently up close to 1%, taking the index to a level last seen in April 2022.

But, today's rise should also be seen in the context of the last two months. Since 30 September 2022, the ASX 200 is up by over 13%. Keep in mind that the historical average return per annum of the ASX 200 is approximately 10% over the decades. So, the ASX 200 has made a year's return in just two months.

As an example of a rise, the Xero Limited (ASX: XRO) share price is up around 5% today.

A cool older dude with a big white beard and wearing a red scarf holds a boombox stereo on his shoulder and makes rock'n'roll devil fingers with his other hand.

Image source: Getty Images

Expert points to United States Federal Reserve

Stephen Innes said in an article on The Bull that the December Santa rally has sprung alive after signals from the US Federal Reserve that its interest rate rises may moderate, with "jumbo hikes" over. This could be good news for the ASX 200.

Innes suggested that "it's seemingly enough to mark the bottom in the bear market and could lead to a sustainable rally".

According to reporting by CNBC, US Fed boss Jerome Powell said at the Brookings Institution that smaller interest rate rises could happen as early as next month. Powell pointed out that it takes some time for interest rate rises and a reduction of Federal Reserve bond holdings to flow through the economy. Powell said:

Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down.

The time for moderating the pace of rate increases may come as soon as the December meeting.

But, he also made comments indicating that the interest rate could stay high for a while:

Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level.

It is likely that restoring price stability will require holding policy at a restrictive level for some time. History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.

Innes said on The Bull that investors are welcoming a confirmed reduction in uncertainty around the Federal Reserve's expected peak interest rate. He wrote:

… positive global risk sentiment could easily persist into year-end. And the ball could even start rolling toward bull market territory if the November U.S. inflation print eases further.

So while Powell's comments seem to cap upside interest rate risk, they also introduce the element of downside rates risk in the future, which is music to investors' ears.

Still, inflation will need to play along.

Foolish takeaway on the ASX 200

It may well be that the share market has already seen a bottom. Some shares bottomed in June while others may have reached a low in September.

Only time will tell. But it seems investors were waiting for some sort of positive news to bump up share prices.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Xero. The Motley Fool Australia has positions in and has recommended Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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