by Bryan Perry
December 5, 2023
Coming into the month of November, there was a high level of investor trepidation surrounding persistent inflation, further Fed tightening, the risk of a widening of the Israel/Hamas war, a possible government shutdown, and concerns of market acceptance of burgeoning Treasury auctions to meet deficit spending. The economic calendar was also showing signs of a weakening consumer heading into holiday season.
As it turned out, just four weeks later, heading into December, the inflation data at the wholesale and consumer levels came in lower than forecast, a continuing resolution was passed by Congress to satisfy the debt ceiling, a temporary truce between Israel and Hamas materialized, the summit between President Biden and China’s Premier Xi Jinping was taken as “market neutral,” some robust earnings from more big cap tech companies poured in, and Black Friday and Cyber Monday each posted record sales.
What became crystal clear, after the November rally, is that market sentiment pivoted hard, with the softer inflation data and the notion that the Fed’s had its “Mission Accomplished” banners flying, and triggered an onslaught of fresh buying. The thinking that took hold was not just that the Fed was done raising rates, but that the data implied that Fed rate cuts would come as early as spring, as measured by the Treasury futures market. The CME FedWatch Tool is now giving a 55% probability of a rate cut in March.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Strong earnings from the tech sector have stoked investor confidence to where sentiment is broadening to support lagging sectors. The analyst community is very split as to the economic outlook for early 2024, mostly depending on the health of the consumer. With bond yields bumping lower, the positive knock-on effect is already being felt in the mortgage market, with applications up for four straight weeks.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
However, home prices still remain elevated, as are costs for professional services like insurance, repairs, medical, education, travel, etc. Seeing wages climb all last year to keep pace with inflation is something that won’t be lowered, and those higher labor costs will invariably be passed along in the form of higher prices for goods and services. For example, auto prices are already being raised to reflect the UAW contract agreement, which included across the board wage increases.
To this point, one could argue that inflation might be bottoming out during the current quarter, at around a 3% annual pace. Getting to the Fed’s 2% target would imply a sharper slowdown than the market is pricing in. So, the old saying of “be careful of what you wish for”, should be heeded.
Hedge fund manager Bill Ackman of Pershing Square, who called the bond market to a tee, is forecasting a hard landing in the first quarter of 2024, saying the consumer will slam on the brakes due to being way too leveraged. So far, the consumer has proved all the naysayers wrong. We’ll see.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Two encouraging developments occurred last week that fueled further optimism for the current rally. Both the Russell 2000 Small Cap Index (IWM) and the Regional Bank Index (KRE) broke out to the upside. Each index had been unable to clear their respective 200-day moving averages until mid-week, when bond yields took another leg lower, igniting a fierce buying spree on huge volume in both sectors.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The broadening out of the market is like a force of nature when it takes hold, and though everyone and their brother would give their right arm for a 5% pullback to add stock exposure at way more attractive prices, the 10-year Treasury Note yield dove to 4.21% from 5.0% over a five-week period, so the yield curve is once again inverted, explaining the rising expectations for a quarter-point cut at the March FOMC meeting. The Fed can’t ignore the radical move in bond yields when going out on the curve.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
We’re in a very unusual time, having gone through a surge in inflation, a rapid rise in interest rates, an economy showing surprising strength, but at what price? There is now over $310 trillion in debt around the globe, most of it on the balance sheets of governments and central banks. Unwinding this debt bomb without triggering a recession is the next big hurdle facing central banks, which will play out during 2024.
For now, though, the market is on good footing, supported by brisk insider buying, stock repurchases, and bullish fund flows out of money markets into equities that should make for a rosy, cheerful finish to 2023.
All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
The Fourth Quarter Started Slow, but It May Finish Strong
Income Mail by Bryan Perry
Stocks Building on Gains Under the Power Of Bullish Fund Flows
Growth Mail by Gary Alexander
After a Bountiful Thanksgiving, Will Santa Deliver Too?
Global Mail by Ivan Martchev
A “Reluctant Rotation” Has Begun
Sector Spotlight by Jason Bodner
Only You Can Prevent (or Profit From) Market “Forest Fires”
View Full Archive
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Bryan Perry
SENIOR DIRECTOR
Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.
Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry
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