- Nov. 9, 2023
-- Key takeaways:
- Stocks rallied sharply last week, as economic data and Fed commentary spurred a decline in interest rates.
- The outlook for monetary policy remains firmly behind the wheel for financial markets. The Fed held rates steady at its meeting last week (as expected), but it struck a more balanced tone around its outlook for upcoming rate decisions, which we think supports our view that the Fed rate-hiking cycle can be complete.
- The latest employment report further supported optimism that the Fed can move to the sidelines, with labor-market conditions cooling enough to help inflation continue its trend lower, while remaining sufficiently healthy to support the consumer and avoid a more severe recession.
Halloween decorations were replaced by Starbucks' beloved holiday cups last week, an annual shift that ushers in the holiday shopping season. Another shift transpired as well, with the recent surge in interest rates giving way to a notable pullback in yields that cleared the path for a healthy (and welcome) rally in the stock market.Equities rallied sharply on the back of falling rates last week.
The catalysts for last week's shift were
- a Fed meeting that produced another pause in the policy rate, accompanied by commentary that suggests policymakers aren't convinced more rate hikes are preordained;
- Fresh data offering additional evidence that the economy is cooling enough to bring down inflation, but not so much that a material downturn is imminent or inevitable; and
- Earnings announcements that have generally come in "better than feared," signaling some hope that corporate profits can hold up despite macroeconomic headwinds.
Stocks have been under pressure for much of the last two months, as resurgent rates soured the market's mood. We're not surprised by last week's turn, as we've noted in our last several Weekly Market Wraps that 1) the recent jump in rates looked to be driven by more temporary factors ("higher for longer" message and Treasury bond issuance) versus a structural change in the inflation outlook, and 2) a peak and pullback in 10-year yields would be the spark needed to provide footing for the stock market.What might a rebound look like?
- 'Tis the season. We don't endeavor to predict short-term market moves, but our view has been that the pullback in equities and recent surge in interest rates was creating an attractive opportunity within both stocks and bonds. If history is a guide, the calendar could be tilted in investors' favor, as stocks have typically enjoyed strong returns in the November-December time frame. Since 1980, the stock market has delivered a gain in the final two months of the year 79% of the time.