November 18, 2023 Market Update

U.S. stocks rose for a third week, approaching a three-month high.  The S&P 500 Index extended its recent rally with a 2.3% advance through the close of trading on Friday, November 17th.

The bond market joined the party as interest rates fell (bond prices and yields move inversely).  The 10-year U.S. Treasury rate, for example, slipped on Friday to settle at 4.44%, matching Tuesday’s close, which is the lowest since late-September.

The Labor Department’s most recent report on consumer prices was released last week and, for the most part, it was just what investors were hoping for.  It revealed that the rate of inflation in October, as measured by the Consumer Price Index (CPI), was unchanged on a month-over-month basis, and the 12-month CPI inflation rate fell to 3.2% from 3.7% in September.  In addition, core CPI, which strips out volatile food and energy sectors of the economy, also cooled more than expected with a moderate 0.2% rise. 

The news persuaded many market pundits and investors that the Federal Reserve’s rate hikes have come to an end for this cycle.  Prior to the CPI report, Mr. Market put the odds of a quarter-point Fed rate hike on December 13th at 14%, and the odds of a hike at the subsequent policy update on January 31st, at 27%.  Those odds both fell to zero after the CPI report was issued. 

Many now believe that the Fed will be able to thread the proverbial needle by bringing inflation under control without triggering a full-blown recession.  “It was fair to wonder last year whether labor market overheating and, at times, unsettling high inflation mindset could be reversed painlessly” says Goldman Sachs.  “But these problems now look largely solved, the conditions for inflation to return to target are in place, and the heaviest blows from monetary and fiscal tightening are well behind us.”

While it seems the chances of a so-called soft landing are improving, there is still the potential that America’s economy will encounter significant turbulence before touching down.   Core inflation is still twice that of the Fed’s 2% target rate.  The jobs market is showing signs of weakening and retail sales fell in October.  In addition, more Americans are struggling to keep up with their debt obligations in the face of soaring interest rates, resumed student loan payments, and growing credit card balances.  

So, it’s probably too soon to throw caution to the wind.  Accordingly, while the “fasten seat belts” sign may be turned off, it can be dangerous to move about the cabin while the plane is in its final descent.

That’s all for now.  Have a great weekend and invest wisely my friends.