Weekly Market Update: November 20, 2023
The U.S. inflation situation is improving. This was reflected in the October price data. Specifically, the Consumer Price Index (CPI) was unchanged last month, which was better than the consensus forecast of a 0.1% increase and down sharply from the 0.4% September gain. It was the lowest reading since the June, 2022 high. The core CPI, which excludes the energy and food components, also eased on a month-to-month basis, increasing just 0.2%. On a 12-month basis, the respective CPI and core CPI rose 3.2% and 4.0%, with both figures coming in below forecasts. The companion report on producer prices also showed an easing in inflationary pressures.
The Federal Reserve continues to indicate that interest rates will remain high for a longer period. The Federal Open Market Committee (FOMC), which has one more 2023 monetary policy gathering in mid-December, held the federal funds rate steady in a “sufficiently restrictive” range of 5.25% to 5.50% at this month’s meeting. Although senior Fed officials said there still remains a bias to tighten the monetary reins further, Wall Street clearly thinks that the central bank is finished. Treasury market yields eased on this sentiment and equities rallied.
Third-quarter earnings season proved to be a successful three months for Corporate America. With nearly all of the S&P 500 companies having reported results as of press time, more than 80% beat earnings forecasts. Earnings growth was averaging around 4%, which would mark the first quarter of year-to-year earnings expansion by the index since the third quarter of 2022. On an even more positive note, the Wall Street consensus is calling for earnings growth in each of the next three quarters, suggesting that the earnings recession for U.S. corporations may be fading in the rearview mirror.
Conclusion: The recent notable retreat inTreasury market yields is fueling rallies in both the equity and bond markets. As noted above, the prevailing sentiment on Wall Street that the Federal Reserve is done raising the benchmark short-term interest rate has emboldened the market bulls. However, with credit market conditions still tight, we think the best way to play this rally is through a combination of high-quality stocks, cash holdings, and some fixed-income exposure.