The holiday season is upon us, and many investors are eagerly awaiting the traditional “Santa rally,” a period of heightened market activity and buying that typically occurs in the final months of the year. However, this year’s rally has been marked by unusual volatility, with some experts suggesting that there may be underlying flaws at play.

According to John Hartnett, a well-known market strategist, the current narrative surrounding AI and government backstops has created a complex web of expectations that are driving market behavior. Specifically, he argues that the belief in an AI boom/bubble and the notion that government backstops are for “national security” reasons have led to unrealistic expectations around the Fed’s ability to stabilize the market at high levels.

Hartnett believes that these expectations are flawed, as they ignore the fundamental factors that drive market behavior, such as economic growth and valuation. He suggests that the Fed is not just cutting interest rates at high levels but is set to launch QE in H1, which will further exacerbate the bubble in expectations. Additionally, he anticipates that tax cuts next year will be augmented by $2k stimulus checks, which could further fuel the rally and create a self-reinforcing cycle of optimism.

While these factors may contribute to the current market volatility, Hartnett cautions against reading too much into them. He notes that the bubble in expectations is a key driver of risk assets’ struggles at the highs, and that investors should be cautious when considering their investment strategies.

Ultimately, Hartnett’s insights highlight the importance of understanding the underlying factors that drive market behavior, rather than simply relying on surface-level narratives. By doing so, investors can make more informed decisions and avoid getting caught up in unrealistic expectations and market volatility.