In November, the U.S. stock market continued its upward move as the S&P 500 rose 5.6%, the Nasdaq was up 4.5% and the Dow was up 6%. Bonds made their biggest move all year, as the Aggregate Bond Index price moved up by 3.5%. Since bond yields fall when prices move up, the interest rate decrease on longer term bonds helped move stocks up. However, shorter term bonds are still yielding more than intermediate and long-term bonds and the yield curve, mentioned so often as an indicator for an upcoming recession, held its inverted position with yields on the 2-year Treasury, at 4.31%, still above the 10-year Treasury which is at 3.60%. This inversion has long been a predictable bell weather for an economic recession.
Global political and economic news continues to impact the markets. The war in Ukraine, China’s Zero Covid policy and the risk of a global recession are high on the list. The FOMC and Fed Chairman Powell had a lot to say regarding this and other impacts on the economy in a speech on November 30th. The Fed is greatly concerned with how inflation has imposed “significant hardship, straining budgets and shrinking what paychecks will buy” said Powell. They realize this hurts lower income people the most and see it as their responsibility to obtain lower inflation and bring about more price stability. The goal is to bring core inflation back down to 2%. It is between 5-6% right now. With the current rate in mind, the Fed feels the need to raise interest rates enough to eventually bring that rate to 2%. Powell said that it’s hard to know how long that will take or how high rates have to go, but they have made substantial progress since last March and hope to be able to lower the rate that they have been increasing the Fed Funds interest rate. Most economists are predicting a ½ of a percentage point increase in December vs the ¾ of a point that the last few increases have been. The markets loved this news and rallied 3% on Wednesday November 30th after Powell gave his speech.
A 3% rally in one day is a very rare occurrence. It only happens 0.03% of the time and often is significant enough to cause the markets to rally further in short order. The problem is that we still have many headwinds and indicators telling us that a recession is imminent for 2023, including the inverted yield curve and the expected continuation of higher short term lending rates. Many market pundits are calling for a new low for the markets sometime in 2023 and aren’t expecting any long-term rallies until the Fed has reversed course and begins to ratchet the Fed Funds rate lower again.
There’s a good news bad news scenario in many of the recent economic reports. A record number of Americans were shopping over the Thanksgiving weekend with a 9.4% increase from 2021. Sales also increased over the same weekend and S&P reported that their retail spending index was up strongly for the 3rd month in a row. Holiday sales are expected to continue strongly with an estimated increase from last year of between 6-8%. This is great news for the economy but bad news if the Fed sees it as an indication that the Fed Funds rate should continue to rise at the same ¾ of 1% come this month’s meeting. As mentioned, most analysts are expecting a ½% rise.
Adding a bit of good news on this front is that the Consumer Price Index increased less than expected and a decline from the previous month’s increase. Food costs did go up, but at the smallest pace all year. Adding more uncertainty to all of this was the increase in energy costs, after declining the month before. As has been the case all year, we expect the markets to continue to be a roller coaster ride of unpredictability.
Remember that we are here to help. As always, we are diligently assessing the economic and political implications for your portfolio. Should you have any concerns or questions, or would like to discuss your personal situation, please give us a call.
Opinions expressed are subject to change without notice and are not intended as investment advice or a solicitation for the purchase or sale of any security. Please consult your financial professional before making any investment decision.
Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining markets. The indices mentioned are unmanaged and cannot be invested into directly. Past performance does not guarantee future results.
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