Market Commentary: What a Month!

What a Month!

The S&P 500 gained 8.9% in November for one of its best monthly returns ever. One month ago, stocks were in a correction, fear was everywhere, and talk of a new bear market and a recession were in the news. Then a funny thing happened … stocks soared!

  • The year-end rally continued last week, with stocks up five weeks in a row.
  • Stocks soared in November for one of the best months ever, but history suggests more gains are likely.
  • Although some near-term weakness is possible, we expect further gains during the typically strong month of December.
  • Inflation continues to come back to earth, suggesting it will no longer be a headwind in 2024.
  • The Fed is now expected to cut rates in 2024, which should help support both stock and bond markets.

What sparked the historic rally? Sentiment had become extremely pessimistic, which meant some good news was all that was needed to initiate a surge. The economy overall remained firm and the consumer quite healthy all along, but the realization that inflation was no longer a headwind prompted stocks to rise. The encouraging inflation data last month was significant as it indicated the Fed is likely done hiking rates and the odds for cuts next year are increasingly strong.

Here’s the good news for investors. Huge monthly gains tend to happen near the beginning of bullish trends. In fact, after a monthly gain of at least 8%, the S&P 500 has been up a year later 90% of the time for an average of 15.8%.

Stocks Like December

Here’s some more good news. There is no month stronger than December, which has experienced gains 74% of the time and is up a very impressive 1.4% on average.

The average return for December jumps to 2.9% in a pre-election year, such as we are in now. And our research shows returns have also tended to be strong when stocks were up more than 10% heading into December, ending the year higher 17 of the last 20 times and 12 of the last 13. In other words, expect markets to chase year-to-date returns this month.

We will leave you with this. Don’t be overly surprised or concerned if stocks see some early December weakness after the huge rally. In fact, stocks tend to be weak early in December, but they typically surge later in the month.

The Door Is Open for Fed Cuts

All year we believed the Federal Reserve was unlikely to cut rates in 2023, and we positioned our portfolios accordingly — overweighting cash over longer-term bonds. This was based on our view that there would be no recession in 2023, even as inflation fell and unemployment remained low. This was in sharp contrast to most other investment firms that predicted a recession and believed higher unemployment would be necessary to curb inflation.

The markets played out as we expected. As of October, the Fed’s preferred inflation measure, the personal consumption expenditure index (PCE), has risen just 3% since last year. That’s the lowest reading since March 2021. The major decline in inflation initially came from falling energy prices, but now we’re seeing disinflation in every other major category.

Even better, disinflation is happening where it matters most as far as the Fed is concerned. Core PCE, which excludes food and energy, has run at a 2.4% annualized pace over the last three months and 2.5% over the last six.

What does this all mean? Fed officials are now acknowledging that inflation can fall even as the economy remains strong and unemployment stays low. On top of that, we expect disinflation to continue into 2024.

At their September meeting, Fed members projected core PCE to be 3.7% in 2023 and 2.6% in 2024. They also projected two rate cuts in 2024 based on these inflation expectations.

Here’s the thing — we have already hit the 2023 targets: Core PCE is running at a year-over-year pace of 3.5%, and as we noted earlier the six-month pace is just 2.5%. That pace is already ahead of the Fed’s estimates, and the Fed’s own projections suggest what’s coming next.

Not only are there no more rate hikes expected, but the groundwork is in place for a pivot to rate cuts in 2024. Investors are currently pricing in close to 50% odds for the first 0.25% rate cut to happen by March and two cuts by June. We’re a tad skeptical that the Fed will cut as early as March — Fed members will likely want to see more data before proceeding with the first cut — but one rate cut by June is possible.

Over the full year, investors expect the federal funds rate to fall from its current range of 5.25-5.50% to the 4.0-4.25% range (the equivalent of 4-5 rate cuts). At this point, given our expectations for a fairly robust economy in 2024, it’s hard to see the Fed cutting that many times.

What’s more likely is the Fed will pursue a few “insurance” cuts, especially if weaker economic data raises the risk of a recession. It may be similar to what the Fed did in 1995-1996, when it cut rates by about 0.75% after an aggressive rate-hike cycle in 1994. The labor market stayed strong, business investment rose, and higher productivity growth continued for several years.

Long-term interest rates are also falling as investors now expect longer-term policy rates to be in the vicinity of 3.5-4.0%, rather than 4.5%. That’s still higher than the Fed’s long-term expectation of just 2.5%, but that means investors expect a stronger economy in the future than the Fed does.

In any case, lower interest rates are a significant potential tailwind for the economy, as they can push mortgage rates lower, which will boost housing activity. Lower rates can also spur business investment and cyclical parts of the economy, such as manufacturing.

Considering all these factors, 2024 is shaping up well for the economy and company profits, which is encouraging news for investors.


This newsletter was written and produced by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The views stated in this letter are not necessarily the opinion of any other named entity and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.

S&P 500 – A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ 100 Index is a stock index of the 100 largest companies by market capitalization traded on NASDAQ Stock Market. The NASDAQ 100 Index includes publicly-traded companies from most sectors in the global economy, the major exception being financial services.

A diversified portfolio does not assure a profit or protect against loss in a declining market.

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