Weekly Market Update: December 4, 2023
Treasury market yields pulled back notably in November, including the benchmark 10-year note. The cause was recent moderation in inflationary pressures (October consumer and producer price growth eased), coupled with rising sentiment on Wall Street that the Federal Reserve is done raising the benchmark short-term interest rate, which have put downward pressure on Treasury yields. This fueled a buying spree in the U.S. equity market last month.
High interest rates for an extended stretch, though, appears to be the consensus among senior Federal Reserve officials. The minutes from the early November Federal Open Market Committee (FOMC) meeting showed no indication that the lead bank plans to cut rates in the near future. Solid economic data, including a still-healthy labor market, give the central bank no reason to reverse course on monetary policy.
Third-quarter earnings season was a success. The S&P 500 companies delivered profit growth in excess of 4%. This marked the first year-over-year gain for the index since the third quarter of 2022. The solid performance for Corporate America also adds weight to the narrative that the Fed can orchestrate a soft landing for the economy.
There looks to be a growing disconnect between hard and soft economic data. In general, the latest series of economic reports, save for housing, have been solid, but sentiment indicators are weakening. Although the Conference Board’s Consumer Confidence Index for November was in line with expectations, the October figure was revised sharply lower, to its weakest reading since January of 2021. This bears watching as the U.S. consumer has been the linchpin of the recent economic expansion. On the plus side, salaries, as measured by the average hourly wage, are now rising at a faster pace than consumer and producer prices, which boosts the purchasing power of the consumer. Of note, the holiday shopping season got off to a strong start, with U.S. Black Friday online spending reaching a record $9.8 billion.
Conclusion: The current investment backdrop, which includes falling Treasury market yields, may set the stage for a late-year “Santa Claus” rally for stocks. But with the S&P 500 Index recently trading at a valuation above its 10-year price-to-earnings multiple, we think a portfolio that includes high-quality stocks is warranted.