Broad market index and tech stock investors were in command throughout January, even as the month ended with a Federal Reserve (Fed) meeting taming some potentially over-enthusiastic March rate cut bulls.
Major Stock Indexes
January was good for long-term investors in U.S. stocks, especially in megacap tech with AI exposure. Market bulls were cheering the prospects of a more accommodating Fed in 2024, with the rate decision and Fed statement happening on the last day of the month.
For the month of January, the S&P 500 added 1.59%, the Nasdaq 100 tacked on 1.82%, and the Dow Jones Industrial Average rose by 1.22%.
Mixed/Slowing Inflation Signals
The overall trend for inflation was mixed in January, even as Consumer Price Index (CPI) data came in a bit hot.
CPI: The December Consumer Price Index showed a 0.3% monthly increase in December and a 3.4% increase versus one year ago. Estimates were for a 0.2% monthly gain in December and a 3.2% gain year-over-year. Shelter and services pricing remained sticky.
PPI: For December, the Producer Price Index report came in below expectations, indicating mixed signals on the inflation front.
According to the report, wholesale prices declined by 0.1% month-over-month in December, lower than the expected gain of 0.1% estimated by Dow Jones economists.
PCE: According to the most recent Core Personal Consumption Expenditures (PCE) release, the rate of price increases slowed down as 2023 came to a close.
The Fed’s preferred inflation indicator showed that prices were higher by 0.2% month-over-month in December and by 2.9% year-over-year. Dow Jones economists had expected respective increases of 0.2% and 3%.
However, digging a little deeper and looking at the three and six-month averages of Core PCE on an annualized basis, we see it running under 2% (the Fed’s Target is 2%).
This data, noted by former Vice Chair of the Federal Reserve Lael Brainard and provided by the Bureau of Economic Analysis, has inflation watchers cheering the current market environment.
Fed Put?
In plain English, a “Fed put” means that the Fed is standing by to change policy if needed, should the equity markets experience declines.
At present, it feels like there are the makings of a Fed put under the market. If storm clouds arise, the market is expecting the Fed to “come to the rescue” with rate cuts in 2024 if needed.
The market was expecting six rate cuts in 2024 before the January Fed meeting, even though the economy has been performing well as of late. This outlook is not the norm. Historically, rate cuts are seen in struggling or downtrodden economies that need stimulation.
The January Fed meeting tempered expectations for a March rate cut, with probabilities declining from 50% to 35.5% on January 31. However, it is still early in this election year.
This idea of a Fed put is a concept, not a guarantee, and seemed to be on the mind of many market participants at the start of February, indicating that the collective market mindset could be that any pullbacks may be short-lived.
Treasury Yields Steady in January
The widely monitored 10-year Treasury note yield was close to unchanged for the month of January, closing the month near 3.966% — about 10 basis points higher than December’s closing level near 3.865%.
January marks two consecutive monthly closes below 4.00% in the 10-year yield.
The steadiness in rates is good news for sidelined prospective mortgage borrowers and great news for long-term investors in U.S. equities.
Fed Rate Decision
The last day of January gave us the first Fed meeting of 2024, as the Fed left interest rates unchanged in line with market expectations.
There were some changes to the Fed’s statement, however, as Federal Reserve Chair Jerome Powell seemed to want to tame the market’s excitement for a March rate cut.
“I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting to cut rates,” Powell said.
The verbal statement indicating that a March rate cut is not likely poured some water on the fire of potentially overly enthusiastic stock market bulls as the major averages pulled back during and after Powell’s commentary.
Powell did signal rate cuts at some point in 2024, however.
“It will likely be appropriate to begin dialing back policy restraint at some point this year,” said Powell.
Consumer & Employment Strong
Consumer health metrics remained strong during January, even as many analysts expect the consumer to “tap out”.
At the same time, labor market data exceeded expectations for December, showing 216,000 jobs created. Government jobs and health-care-related fields led the way.
Starting the month of February, the latest employment report blew away all expectations, showing 353,000 jobs created in January versus 185,000 estimates by Dow Jones. The labor market continues to surprise to the upside, and the market reaction was an interesting one.
January Labor Data Market Reaction
While the massively better-than-expected January jobs data indicates a stronger economy, it also shows that the economy may still be running hotter than the Fed wants to see. This reinforces the logical probability that a March rate cut could be off the table.
Major U.S. stock indexes didn’t seem to mind, though, as they cheered the data by trading to the upside on the day of. The jobs report was released the morning after positive earnings results from Meta (Facebook), Microsoft, and Amazon. So, perhaps this earnings effect outshined the March rate cut odds everyone seemed to be so fixated upon just a day before.
The probability for a March 25-basis-point cut was all over the place at the end of January and beginning of February, resting at a 20% chance on February 1 after sitting at a 46.2% chance on January 26th, according to the CME FedWatch Tool.
Is the economy still too hot? What do the continuing and massive upside surprises in the job market mean for inflation?
…..
Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Major U.S. stock market indexes once again traded to the upside last week, with encouraging economic data helping to buoy the gains. With so much going on, this is an overview of last week, plus what is on the horizon this week.
Tallying last week’s major stock market index performances, the S&P 500 increased by 1.06%, the Nasdaq 100 rallied by 0.62%, and the Dow Jones Industrial Average rose by 0.65%.
Solid GDP Gains
Gross domestic product (GDP) measures the total amount of goods and services produced by a country, and it showed impressive gains in the fourth quarter of 2023. Data shows it grew at a whopping 3.3% annualized rate in Q4 2023 versus economist expectations for a 2% gain.
Data prints like these can be surprising — how can there be such a large disparity between expectations and the actual result? Consumer and government spending can influence the data to an extent, and perhaps we saw some of that in this data release.
Major stock market averages took the data in stride, finishing higher on Thursday after the data was released. Thursday’s close also marked the fifth straight record close for the S&P 500.
Inflation Relaxation
The rate of price increases cooled as 2023 came to a close, according to the most recent Core Personal Consumption Expenditures (PCE) data release.
The Fed’s preferred inflation indicator showed prices up 0.2% in December and prices higher by 2.9% year-over-year. Dow Jones economists expected respective increases of 0.2% and 3%.
So, it is safe to say that prices have been increasing less aggressively overall, but we are still a long way from pre-2020 levels and the Fed’s target of 2%.
It’s Fed Week
On top of all the economic data slated for release, we have the January Federal Open Market Committee meeting on January 30-31, with the big decision on interest rates and the subsequent commentary scheduled for 2:00 p.m. ET on the 31st.
As of last Friday’s market close, probabilities show a 96.7% chance of no change in interest rates and a 3.1% chance of a 25 basis point cut at the January 31st meeting, according to the CME FedWatch Tool.
Investors will be scouring the written statement for clues about the future timing of Federal Reserve (Fed) interest rate policy changes.
Earnings Season
It is also a big week for earnings, with juggernauts Microsoft and Alphabet set to report. AI commentary on the conference calls will undoubtedly be a focus of investors, with both companies at the forefront of this arena.
As of Friday, for Q4 2023 (with 25% of S&P 500 companies reporting actual results), of these companies, 69% have reported actual EPS above estimates, which is below the 5-year average of 77% and below the 10-year average of 74%, according to data from Factset.
Earnings season heats up this week and into February.
The Takeaway
Major U.S. equity indexes continued to be supported by solid economic data releases, and we get the double whammy of earnings season and the Fed this week.
Market narratives are dynamic, and many investors want to see an earnings and fundamentals-driven stock market (as opposed to such a Fed-driven and perhaps AI-driven one). That could be in the cards soon, once the picture of the Fed becomes clearer over the next few months. We will look for clues of such a shift throughout the remainder of the Q4 earnings season.
The January 31st Fed meeting has market expectations of producing no changes in interest rates, according to the CME FedWatch Tool. Market watchers will be all ears for transparency and clues regarding the Fed’s mood going forward.
Earnings expectations are rather tempered overall as we approach the bulk of the season. However, expectations are high for AI-associated names, with a large concentration of the stock market’s gains being in information technology.
…..
Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Adding on to the gains from the week before, the Dow Jones Industrial Average and S&P 500 put in another positive week, causing the S&P 500 to break its all-time daily closing high previously set on January 3rd, 2022. Strength was noted in technology stocks, paving the way to the broader market record close.
Overall, the S&P 500 rose by 1.17%, the Nasdaq 100 added 2.86%, and the Dow Jones Industrial Average was higher by 0.72%.
Consumer Sentiment Rises
According to data from the University of Michigan’s Consumer Sentiment report, consumer confidence has surged, and data shows the biggest two-month gain since 1991.
This data can be seen as confusing, as many Americans are struggling to make ends meet with necessities like food and shelter at high costs.
Credit card balances are rising, too, and so are delinquencies. But the data is the data, and it showed the Consumer Sentiment Index came in at 78.8, up 9.1 (13.1%) from the December final reading. The latest reading was above the forecast of 70.0.
Rate Cut Expectations Shift
Nothing stays the same for too long in the financial markets. Rate cut expectations shifted over the past week, with the probability of a March rate cut sitting at 46.2% at the end of the week versus 76.9% one week prior.
Hawkish rhetoric from voting Federal Reserve (Fed) Governor Christopher Waller included a note that while inflation is approaching the 2% target, the Fed should not rush towards rate cuts until it is clearer that lower inflation has been sustained.
Other Fed voting member commentary last week included Atlanta Fed President Raphael Bostic noting that he expects rate cuts to happen in the third quarter. Bostic seemed more dovish than Waller.
Voting Fed members speak frequently, and It is helpful to pay attention to the commentary of the other voting Fed members (not just Powell) to gauge Fed sentiment.
The S&P 500 digested the commentary and obviously did not mind it, finishing the week at all-time closing highs even as 10-year note yields ended higher on the week.
Treasury Yields Climb
Ten-year note yields were back on the rise last week, adding around 19 basis points to settle near 4.145%.
The uptick in 10-year note yields last week may show the market’s negative reaction towards rate cuts beginning later than desired and further digestion of recent CPI data. The 10-year yield tends to rise when higher borrowing costs (i.e., higher interest rates) are expected. Despite this, the Dow and S&P 500 still closed the week at fresh all-time highs.
The 2-year note yield also rose last week, adding around 24 basis points to close the week near 4.389%. The 2/10 yield curve remains inverted – which often signals a recession – although the inversion is well off its steepest levels experienced in mid-2023.
The Takeaway
S&P 500 all-time highs: that sums up the broader U.S. economy right now for long-term investors.
Consumer sentiment can be a real riddle, with credit card balances and delinquencies rising. This data illustrates a disconnect between the lives of a large segment of Americans and the associated government data.
But for long-term investors, the “data doesn’t matter” sometimes. Staying dedicated to a disciplined plan has proved to stand the test of time.
As the market seeks a dominating narrative for 2024, we will be keeping our eyes on the effect of Treasury yields on major stock market indexes. Last week saw rising yields, and the major equity indexes not only didn’t mind but surged to the upside.
…..
Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Major U.S. equity indexes traded higher last week as investors interpreted wholesale and consumer pricing inflation data for December.
Overall, for the week ending 01/12/24, the S&P 500 rose by 1.84%, the Nasdaq 100 increased by 3.23%, and the Dow Jones Industrial Average gained 0.34%.
Inflation Data Mixed, Well Received
CPI: December Consumer Price Index (CPI) data came in hotter than expected last Thursday, showing a 0.3% monthly increase in December and a 3.4% increase versus one year ago. Estimates were for gains of 0.2% monthly in December and a 3.2% gain year-over-year.
Shelter prices were the main culprit for higher prices, with prices showing a 0.5% increase for the month. Service pricing also remained sticky.
After an initial downside reaction to the data release, markets shook it off and slowly traded upwards from the news release lows throughout the day and the following day, showing a different reaction to a hotter-than-expected CPI than we are used to. Treasury yields also traded slowly lower throughout the day after an initial spike on the news release.
PPI: After the warm-to-hot CPI print on Thursday, Friday gave us a Producer Price Index (PPI) data release that was below expectations, showing mixed signals on the inflation front.
The report showed wholesale prices falling by 0.1% in December month-over-month, below the Dow Jones economist estimate of a gain of 0.1%.
Core PPI, which excludes volatile food and energy, was flat versus the estimate for a 0.2% increase.
The PPI data release was received in a rather muted fashion by the markets, as the major stock market averages closed higher for the week.
Treasury Yields Fall
One surprise last week was the 10-year note yield’s reaction to the warm/hot CPI data last Thursday. In the past, yields would have risen and kept rising on CPI data like this. This time, they quickly rose on the data release and subsequently fell throughout the day as major equity indexes rose.
This price action further illustrates the market’s expectations for lower rates to come in the future. Market expectations for six rate cuts are real. Could the market be wrong?
Bitcoin ETFs Launched
In a historic move for cryptocurrency, 11 spot Bitcoin ETFs were launched last Friday, ending a lengthy debate about the likelihood of this type of ETF.
On the day before the ETFs were approved and trading started, there was some confusion and drama. The SEC’s Twitter account was reportedly hacked, and a tweet was released claiming that the approval had been granted, even though it had not yet been approved.
The price of spot Bitcoin was lower by approximately 2.48% for the week as of Saturday. Spot Bitcoin trades 24/7, but the ETFs trade during normal market hours.
The Takeaway
2024 is young, and markets are feeling out the market direction, clarity, and narrative. Stock bulls seem to have the upper hand so far this year, as hopes for rate cuts are the prevailing narrative.
The digestion of the most recent inflation data was constructive, and market participants now look to next week’s retail sales data and consumer sentiment data. We, the consumer, are responsible for 70% of the nation’s gross domestic product (GDP), so everyone will be watching this data for indications of consumer health.
Treasury yields reacting to the downside on warm/hot CPI data is encouraging, which could help to spur lending activity.
…..
Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Major U.S. stock indexes took a breather to start the year, breaking a nine-week winning streak, while labor market data continued to impress.
Potential tax selling by investors in the new year (thus avoiding the tax bill until April 2025) could also have been in play during the first trading week of the year.
Tallying last week, the S&P 500 fell by 1.52%, the Nasdaq 100 declined by 3.09%, and the Dow Jones Industrial Average decreased by 0.59%.
Payrolls Strong
The United States economy added 216,000 new jobs in December, which is greater than the majority of economists’ predictions near 170,000. The result was the largest monthly increase in three months.
The unemployment rate remained unchanged at 3.7%. In total, the economy produced 2.7 million jobs in 2023, with an average monthly gain of 225,000.
Once again, government job creation led the way, with leisure and hospitality/health care coming in second and third.
Treasury Yields Bounce
The 10-year yield finished near 4.043% last week, 17-18 basis points higher than the prior weekly close, and crossing the 4% level to the upside for the first time since early December. Remember, yields tend to rise along with interest rates on a variety of products.
With so much talk of lower interest rates in 2024, it only made sense that rates finally edged up a bit. Expectations for lower interest rates had perhaps gotten a bit giddy.
And remember, we were just approaching 5% yields on tens back in October, and falling to 4% so quickly was welcome news for investors. While the consensus is for lower interest rates in 2024, some analysts have other opinions.
One Wall Street forecaster, Jim Bianco, sees 10-year yields moving to 5.5% in 2024 — talk about contrarian. Could he be right?
Part of Bianco’s forecast includes the Fed cutting rates three times this year, which is what the Fed has broadcasted versus the market’s pricing in six rate cuts in 2024.
The most recent rhetoric from the Fed is that rate cuts are likely, but the path to them is highly uncertain.
The market expecting six rate cuts in 2024 may be ahead of itself, barring a major recession. Market bulls were tamed somewhat last week on the December Fed meeting minutes. You can read the full minutes here.
Looking Ahead
Investors are digesting an incredible end to the year in 2023 and looking for the next narrative to form early in 2024.
Thursday, we get a look at consumer inflation for December, after inflation rose at a 3.1% year-over-year rate in November, down from 3.2% in the previous month.
Core inflation (which excludes volatile food and energy) will be on the minds of traders and investors, as it rose 4.0% in November.
Since 4.0% core inflation may be a little high for the Fed’s liking, markets are eager to see if the inflation moderation continued into December and how it could affect Fed rate hike probabilities.
…..
Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Major US stock indexes rose again last week, courtesy of a dovish Federal Reserve (Fed) tone that markets have been waiting for. More on the Fed in just a second!
Overall, last week, the S&P 500 rose by 2.49%, the Nasdaq 100 tacked on 3.35%, and the Dow Jones Industrial Average increased by 2.92%—ending the week at an all-time weekly closing high.
Stock Index Highlights
Given the impressiveness of stock indexes of late, it’s worth digging a bit deeper into each index:
This week (Monday) features an index rebalancing of the Nasdaq 100, with some stocks being cut and others being added. For example, eBay is out of the index as of Monday, and database builder juggernaut MongoDB is in.
Federal Reserve Tone Pivot
At last week’s meeting, the Fed left benchmark interest rates unchanged at the 5.25% – 5.50% level—marking three consecutive meetings of unchanged interest rate policy.
Most importantly, the Fed indicated a higher likelihood of pivoting to a more accommodating monetary policy stance soon (think rate cuts).
According to Fed members, the most recent projections indicate the possibility of three 25-basis-point rate cuts in 2024.
Markets loved the more dovish-sounding Fed last week, and the bulls kept charging, leading major U.S. stock indexes higher and Treasury yields lower.
Full Shopping Carts
The Teflon-like U.S. consumer continued to spend in November, as U.S. retail sales rose 0.3% for the month, rebounding from the 0.2% decline in October and stomping expectations of a 0.1% fall.
Falling gas prices may have helped to bolster the consumer despite a slide of 2.9% in gas station receipts.
Notable spending highlights included gains at bars, restaurants, sporting goods stores, hobby stores, and online retailers.
CPI Near Expectations
Prices for consumer goods and services, as measured by the Consumer Price Index (CPI), edged slightly higher month-over-month in November, showing a 0.1% increase from October and a 3.1% year-over-year rise, according to data from the Labor Department.
The measurements were mostly in line with expectations, with Dow Jones economists expecting no change month-over-month and 3.1% year-over-year.
The report was “somewhat in line, although, I suppose not as good as what some might have hoped that we would start to see more deceleration on a month-over-month basis,” said Liz Ann Sonders, chief investment strategist at Charles Schwab.
While the data was good but could have been even better, markets remained in a good mood. In fact, the S&P 500 touched the highest level since January of 2022 on the same day as the data release, with the markets looking ahead to the Fed the next day.
The Week Ahead
The economic data calendar is a quiet one heading into the Christmas weekend. U.S. equity markets will be closed on Monday, December 25th, in observance of Christmas.
We will get the Fed’s preferred gauge of inflation data via the Personal Consumption Expenditures (PCE) metric and consumer confidence data this week. An in-line reading in PCE could further fuel the markets, providing some confirmation/clarification of the CPI data from last week.
We will also be paying attention to final GDP data, unemployment claims, and University of Michigan Consumer sentiment this week.
Has investor appetite gotten ahead of itself in the short term in anticipation of rate cuts? Let’s see how the final two weeks go and if Santa Claus can find his way to the markets with his rally.
Looking Ahead: Home Stretch
With two weeks left in 2023, it is an opportune time to discuss your investment objectives. Your goals: Have they changed or do they remain the same? Have you discussed your capital gains/losses situation with your tax advisor? Is tax loss harvesting appropriate for you?
…..
Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Overall, major U.S. equity indexes traded slightly higher last week courtesy of a “just-right” monthly employment report. By last Friday’s close, the S&P 500 tacked on 0.21%, the Nasdaq 100 rose by 0.54%, and the Dow Jones Industrial Average closed nearly unchanged—higher by 0.01%.
S&P 500 Highest Close of Year
The broadest measure of the U.S. economy, the S&P 500, closed on Friday at its highest closing level of 2023—a great time to be a disciplined long-term investor!
Bulls were not roaring as loudly last week as they had been in recent weeks, as they were primarily waiting for the big jobs number on Friday.
Last week’s gain for the S&P 500 marks six consecutive weeks of gains.
Smooth and Steady Jobs Report
Market participants wanted to see a “just-right” number heading into the big jobs number last week, and they got their wish!
Jobs data for November implied somewhat of a “Goldilocks” scenario, with nonfarm payroll data showing a seasonally adjusted gain of 199,000 jobs in November, versus the Dow Jones estimate of 190,000. This figure was above the October gains in payrolls of 150,000, with the data interpreted as ”just right”.
Many of the recently created employment opportunities have been in the healthcare and government fields.
The jobs number coming in very close to expectations is welcome news for the markets, as less volatility in actual labor market results versus expectations can be seen as constructive.
Market watchers are enthusiastic about the present labor market picture showing signs of the economy experiencing a soft landing (as opposed to a recession) as the economy begins to cool.
As an added bonus, the U.S. unemployment rate dropped to 3.7% versus expectations of 3.9%, further adding to the goldilocks-like theme.
Treasury Yields Drop Further
After touching the 5% level in October, the 10-year Treasury yield has fallen drastically, closing last week near 4.244% and helping to fuel the rally in U.S. stocks.
Has it fallen too far, too fast? It’s possible.
While the drop in yields has provided the necessary backdrop for equities to rise in November and now into December, a further plunge in yields could garner concerns about retriggering inflation.
For now, lower yields are more than welcome for U.S. stocks. Let’s see how the Consumer Price Index (CPI) data affects bond yields this week.
Inflation Data on Tap
On that note, with the November jobs report out of the way, attention this week will turn to the CPI data on Tuesday morning, followed by the Fed rate decision and subsequent commentary on Wednesday.
The monthly consumer price index for November is expected to show a year-over-year increase of 3.1% after last month’s data showed an increase of 3.2%.
The monthly CPI data has been trending lower since peaking back in July of 2022, where year-over-year increases in prices ran at 9.1%. We have come a long way!
It’s Fed Week
It’s a double whammy this week, with CPI on Tuesday and the Fed on Wednesday. The consensus is that the Fed will leave rates unchanged this week, with the CME FedWatch Tool showing a 97.1% probability of such an outcome as of last Friday’s market close.
More important will be the Fed’s written statement and commentary, through which investors will gauge the Fed’s mood going forward.
Putting It Together
Life can move fast; so can the financial markets. It has been a remarkable change in tune for the financial markets in just a mere five weeks.
It is fair to say that very few people saw the size of the stock market rally coming in November and now leading into December. As long-term investors, we will take it! Sticking to our plan and strategy is the discipline that gets things done.
…..
Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Major Stock Indexes
November was a great one for long-term investors in U.S. stocks—essentially the polar opposite of October.
For the month of November, the S&P 500 added a whopping 8.92%, the Nasdaq 100 tacked on 10.67%, and the Dow Jones Industrial Average rose by 8.77%.
Fed Rate Decision
During November, market bulls were cheering the prospects of a more accommodating Federal Reserve (Fed), hopeful for rate cuts as early as May 2024. Are their expectations too lofty? Let’s dig in.
The fresh month kicked off with the Fed policy meeting on November 1st, as the Fed left interest rates unchanged in line with market expectations.
There were no surprises in the Fed decision, and market participants turned decidedly optimistic that the Fed has finished raising rates, even though the Fed has not made an explicit statement containing this declaration.
Market watchers could be overly optimistic concerning the Fed, with some even pricing in the Fed’s first rate cut in May of 2024.
In the near term, markets expect no change in rates at the December 13th meeting, indicating a 97.1% probability of no change in rates as of market close on November 30, according to the CME FedWatch Tool.
Cooler Jobs Market
The most recent October non-farm payrolls data showed a slightly softer labor market with 150,000 jobs created versus expectations of 170,000, a steep drop from September data, which showed 297,000 jobs created.
United Auto Workers (UAW) auto strikes factored into the data, contributing to a decline in the manufacturing sector. Healthcare, government, social assistance, and construction jobs were areas of strength.
The softer jobs data was cheered by market bulls, potentially indicating that Fed tightening is showing its intended effects by cooling the economy. But we don’t want things to cool too much! Think Goldilocks — we want it to be “just right.”
Consumer Inflation Decelerated in November
To the delight of market bulls, the declining consumer inflation trend continued in November.
Monthly government Consumer Price Index (CPI) data released on November 14th sparked a stock market rally, as the Consumer Price Index showed a 3.2% rise year-over-year in October—below Dow Jones estimates of 3.3%.
Core inflation, which strips food and energy from the metric, fell to the slowest annual pace since September of 2021, at 4%. This was also below analyst expectations of 4.1%.
Falling energy prices helped the headline figure, with oil and gas prices dropping in October.
Decelerating inflation helped set the tone for November, encouraging market bulls that the worst of rising prices could be in the rearview mirror.
Consumer Health
After three straight monthly declines, consumer confidence increased in November, indicating expectations for easier times ahead for consumers.
Retail sales fell less than expected in October, although the figure showed its first decline in seven months. The consumer has remained remarkably resilient throughout the interest rate hiking cycle and inflationary pressures.
And while retail sales fell in October, November could be a different story once the complete Black Friday and Cyber Monday data becomes available.
We, the consumer, drive the economy at the end of the day! It is easy to lose sight of this fact with so many headlines and market noise. Again, the consumer has been unbelievably resilient for a prolonged period.
Treasury Yields – and Mortgage Rates – Fall
Inflation loosening, employment growth declining, major equity indexes up, and lower government bond yields were the prevailing components of the market in November.
The widely monitored 10-Year Treasury Note Yield declined sharply, closing the month at a yield near 4.351% versus October’s closing level near 4.874%. This represented a decline of over 50 basis points month-over-month.
The dip in rates is good news for sidelined prospective mortgage borrowers and great news for long-term investors in U.S. equities. Remember, major U.S. stock indexes and Treasury yields have an inverse relationship.
Relaxed Markets
Short-term market volatility subsided impressively in November, with the CBOE S&P 500 Volatility Index falling to levels not seen since pre-COVID days.
When S&P 500 Volatility falls, it translates to investor fear leaving the marketplace, along with the price of S&P 500 put options declining. Many portfolio managers use S&P 500 put options to hedge market risk, and the appetite for them was weak throughout November, indicating market confidence.
Some investors also watch the CNN Fear and Greed Index to gauge investor sentiment.
As long-term investors, market sentiment in the short term is not a major deciding factor for most of us. However, it can be helpful for those employing dollar cost-averaging techniques.
Unquestionably, investor sentiment did a proverbial “180” from October to November.
The Takeaway
November featured a complete reversal in sentiment from October, courtesy of declining interest rates, continuing signs of softening inflation, and the job market cooling.
Though it might seem counterintuitive at first, the deceleration in inflation and weaker employment data is ultimately good news, as it indicates the Fed’s rate hikes are having the intended effect.
Headwinds remain, but you wouldn’t know it by glancing at the major stock market averages. Long-term investing continues to be the ticket.
…..
Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
U.S. markets were on the quiet side last week in a holiday-shortened trading schedule, with the S&P 500 closing out its best four-week stretch of gains in a year.
Overall, the S&P 500 added 1.00%, the Nasdaq 100 tacked on 0.91%, and the Dow Jones Industrial Average rose by 1.27%.
Federal Reserve Minutes: No Hints of Cuts
According to the most recent Federal Reserve (Fed) meeting minutes, Fed officials don’t seem so gung-ho about cutting interest rates anytime soon, despite the market’s wishes.
Members appear to be concerned that inflation could be sticky or even move higher and that more work may need to be done.
“In discussing the policy outlook, participants continued to judge that it was critical that the stance of monetary policy be kept sufficiently restrictive to return inflation to the Committee’s 2 percent objective over time,” the minutes said.
To put this in “non-Fedspeak” context, the most recent Consumer Price Index data showed inflation running at an increase of 3.2%, and the Fed’s job is to get this number down to 2%. As such, there is still work to be done.
Fearless Markets?
Overall, major U.S. equity markets have been calm in November. The index that tracks market expectations of volatility in the short-term declined for the fifth straight week last week, indicating little fear was present in the S&P 500 as of market close.
In fact, last week, this index, the $VIX, closed at levels not seen since January 2020 on a weekly closing basis.
Things change quickly! Rewind to October, and the $VIX was nearly 84% higher at its monthly high than last week’s closing level.
Presumably, some investors were “shaken out” by the volatility, fear, and headlines featured in October and missed out on the subsequent gains in recent weeks. Investing for the long term reduces the risk of such happenings!
Home Sales Drop in October
Existing home sales dropped 14.6% in October versus the year prior, a 13-year low.
Let’s remember that October coincided with 10-year note yields flirting with 5% (and consequently higher interest rates), so a slowdown in existing home sales can’t be too surprising. Interest rates have retreated somewhat in November.
“Prospective home buyers experienced another difficult month due to the persistent lack of housing inventory and the highest mortgage rates in a generation,” said Lawrence Yun, the National Association of Realtors’ chief economist.
November could show some improvement in residential real estate activity, with 30-year fixed mortgage rates decreasing from October levels and recent signs of inventory inching higher.
Holiday Shopping Outlook
Early indications were that the consumer may have a soft holiday shopping season.
But on Black Friday, the Teflon Consumer struck again, with shoppers spending a record $9.8 billion in online sales. This number was up 7.5% from last year — wow!
What brick-and-mortar sales look like once the totals have been tallied is yet to be seen. Some folks note that inflation-pinched shoppers are holding out for deeper discounts, but you wouldn’t know that from the online sales data that is available so far.
Post Turkey-Week
Since the next jobs report is not due out until December 8th, the big economic report of this week will be the preliminary U.S. gross domestic product (GDP) growth (quarter over quarter) data on Wednesday.
We will also get the Fed’s favorite inflation metric in Core Personal Consumption Expenditures (PCE) on Thursday.
Throughout November, major U.S. equity indexes have exhibited continued strength after a dismal October. We will all be looking to see how the month closes out this week as we approach the final month of 2023.
…..
Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Overall, major U.S. equity indexes maintained their recent positive momentum last week, courtesy of consumer pricing data coming in below expectations. This key data release begs the question: Is inflation in the rearview mirror?
Tallying last week from a numerical perspective, the S&P 500 rose by 2.24%, the Nasdaq 100 increased by 1.99%, and the Dow Jones Industrial Average was higher by 1.94%. The small-cap Russell 2000 Index, which has become a topic of conversation lately, rose by 5.42% last week.
Inflation Cooler
Last week was overall a quiet one for economic data releases, but Tuesday did bring the much-anticipated Consumer Price Index (CPI) data release.
The report did not disappoint market bulls. Consumer inflation showed a 3.2% rise year-over-year in October, a two-year low that was below Dow Jones estimates of 3.3%. Core inflation, which strips food and energy from the metric, fell to the slowest annual pace since September of 2021, at 4%; this was also below analyst expectations of 4.1%.
Falling energy prices helped the headline (i.e., overall) figure, with oil and gas prices dropping in October.
Stocks have been behaving like inflation is in the rearview mirror. However, it’s worth remembering there is still work to do to get inflation back down to the 2% Fed target rate.
Interest Rates Fall
Cooler inflation = lower interest rates – sounds about right!
Treasury yields fell hard last Tuesday on the CPI data, down to levels not seen since September, closing the week near 4.442%. This was a decrease from the previous weekly close near 4.629%.
Popular mortgage product rates fell in tandem with the 10-year Treasury yield last week. Average 30-year fixed mortgage yield declined to near 7.4%, great news for would-be homebuyers! In turn, mortgage applications saw a 3.04% jump for new purchases.
7.4% is not a “low” rate, but it is a welcome sight for many would-be borrowers, as average 30-year fixed mortgage rates were above 7.75% in October.
Federal Reserve (Fed) Expectations
Markets are currently pricing in a 25-basis-point rate cut in May of 2024 and a full percentage point (100 basis points) in cuts by the end of 2024, per the CME Fedwatch Tool. The softening October consumer inflation data certainly helped to reinforce this outlook, but don’t expect interest rates to suddenly drop like a brick; it ought to be a process, and other factors are still in play.
For the next Fed meeting in December, market expectations currently show a nearly 100% probability of no change in interest rates as of last week’s market close.
Fedspeak comes and goes, but let’s remember that the Fed has broadcasted that rates could stay higher for an extended period.
Consumer Slowdown?
The all-important holiday shopping season is suddenly here! Will the consumer continue to shock analysts and spend, spend, spend?
The reality of an extended period of higher interest rates and inflation could set in for many Americans this season, with early indications showing that holiday shopping spending is off to a slow start this year.
The most recent University of Michigan Consumer Sentiment data showed consumer sentiment at a six-month low. This is some food for thought as we approach the holidays and year-end.
The Takeaway
Expectations for a softer Fed and inflation cooling further are the key drivers in the markets right now. Long-term investors were rewarded in November after a challenging month of October.
Falling energy prices have helped to cool headline inflation, and market watchers will be looking for more price softening going forward. At the same time, the consumer has possibly endured high rates and inflation for a long enough period to dampen the holiday shopping season. Overall, stocks seem to be very comfortable with the present narrative at the time of writing.
Lastly, a sliver of good news for Americans: Treasury yields are off their recent highs, which could help to spur lending activity and jumpstart a rather stale and inactive housing market.
…..
Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.