Optimism Ignites Rally
“For every action, there is an equal and opposite reaction.” Newton’s timeless principle resonates beyond physics, often showing up in market action. In November, stock markets enjoyed a strong rebound after a multi-month losing streak.
US stock markets posted the best month in almost a year and a half, with the Nasdaq ending up 10.7% and the S&P not far behind, rising 8.9%. , Stocks began rallying after bond yields peaked in October. It’s important to note that bond prices generally rise when yields fall and vice versa.
Bond yields eased after the Federal Reserve voted to leave rates unchanged on Nov 1, and Fed chair Jerome Powell hinted that the central bank might be done raising interest rates for now.
Equities continued to pick up steam midmonth after data showed consumer prices fell by more than Wall Street expected. The combination of slower consumer spending and easing inflation boosted expectations that the Fed is done raising rates.
Beaten Down Sectors Rally
As investors look for an end to the rate hike cycle, the resurgence in stocks has been fueled by beaten-down sectors and those sensitive to higher borrowing costs, like information technology, real estate, and financials. A broad based rally might indicate that investors are looking for bargains.
Bargain hunting reflects optimism that the economy pulled off a soft landing this year and should avoid a deep recession in 2024. Another reason to celebrate? Rising corporate profits, which rose by 6.7% in the third quarter compared with an increase of 1.6% in the second quarter.
Amidst the gains, there are cautionary notes – we see signs of slowing economic momentum, especially in manufacturing. Jobs and wage growth are slowing, and household disposable income is losing steam.
Even so, stocks were content with the economic news, though liquidity may also have been a factor. Liquidity seems to be rising again, as measured by the reserves commercial banks hold at the Federal Reserve Bank. Although liquidity alone does not necessarily push stocks higher, its presence can create a tailwind for stocks.
2023 Shutdown Avoided
In the midst of this market optimism, the US government managed to avoid a government shutdown with a stopgap bill just days before funding would have expired. Uncertainty had been rising after eight GOP lawmakers led the effort to remove Kevin McCarthy from the House speakership in October. The current House speaker, Mike Johnson, was elected to his post three weeks following McCarthy’s ouster. With a short timeline left before a looming government shutdown, Johnson needed bipartisan votes to pass a continuing resolution extending funding levels.
The new legislation funds the government at current spending levels with staggered funding expiration dates.  Around 20% of the government is financed through January 19, with the rest financed until February 2, which leaves two possible dates for partial government shutdowns. 
The extreme partisanship triggering these standoffs led Moody’s to lower its outlook for the US credit rating to negative. A potential credit downgrade could drive borrowing costs higher and make it more expensive for Americans to borrow money.
Bonds Welcome Treasury Auction Adjustments
As Congress wrestles with trying to pass spending bills, the US Treasury Department has its own challenges with accommodating growing US deficits. The gap between federal spending and revenue has widened more than expected as tax revenues dropped and interest costs expanded from higher rates.  As a result, the Treasury had to increase its sales of longer-term debt at its August quarterly announcement, which helped to fuel a bond rout through the summer and early fall where the 10-year yield touched 5% in October. 
Treasury auctions are becoming more important as investors worry about the swelling supply of long-term debt. However, this past month the Treasury pleasantly surprised Wall Street by cutting back on expected increases in long-term bonds to favor more short-term debt, which sparked a rally in Treasury bonds. 
Bonds posted their biggest monthly gain since the mid-1980s, with Bloomberg’s U.S. Aggregate Bond index rising 4.8% from the bond-buying spree. 
What’s Next: Rate Cut Expectations
November sentiment was generally optimistic, and after the month’s $3 trillion surge, the S&P 500 ended just 5% away from all-time highs. For 2023, the benchmark equity index is up around 19%, although many other asset classes have struggled this year.
The Federal Reserve meets for its final time of the year Dec 12-13, when they will issue a summary of economic projections and perhaps shed more light on the path of rates . Markets expect over 100 basis points of cuts next year and are fully pricing in a rate cut by May, with almost a 50% chance of a move in March. Historically, the end of the Federal Reserve’s tightening cycles have been pivotal moments that delivered double-digit returns for stocks.
As we usher in the holidays, we reflect on a year that has brought opportunities but also tested the patience of investors. Instead of getting caught reacting to the unpredictability of markets, we’re here to proactively navigate the ups and downs with you, and seek tax efficiency while regularly aligning your investments with your long-term goals. The true strength of a well-crafted investment plan lies in its ability to adapt and thrive across different market conditions.
Thank you for your trust in us and the opportunity to dedicate our team to your financial peace of mind.
During this festive time, we extend our heartfelt wishes to you and your loved ones for a joyful holiday season! May you enjoy gatherings with family and friends – filled with laughter and love – and a splendid new year!
Your friends at JSF
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The Bloomberg Barclays U.S. Aggregate Bond Index measures the investment-grade U.S. dollar-denominated, fixed-rate taxable bond market and includes Treasury securities, government-related and corporate securities, mortgage-backed securities, asset-backed securities and commercial mortgage-backed securities.
The S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock market.
The Nasdaq Composite is a market-capitalization-weighted index consisting of all Nasdaq Stock Exchange listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds or debenture securities.
Treasury Bond- is a U.S. government debt security with a fixed interest rate and maturity between two and 10 years.
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced in a specific time period. GDP is the most commonly used measure of economic activity.
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