Tag: U.S. 10 Year Treasury Note

Oil prices jump after drone attack kills U.S. troops, escalating Mideast crisis

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Oil futures popped higher Sunday evening, after a drone attack that killed three U.S. service members in northern Jordan, blamed by the White House on Iran-backed militants, marked a major escalation of tensions in the Middle East.

West Texas Intermediate crude for March delivery
CL00,
+1.22%

CL.1,
+1.22%

CLH24,
+1.22%
was up $1.09, or 1.4%, at $79.10 a barrel on the New York Mercantile Exchange. March Brent crude
BRN00,
+1.15%

BRNH24,
+1.14%,
the global benchmark, gained $1.11, or 1.3%, to trade at $84.66 a barrel on ICE Futures Europe.

Much will ultimately depend on the U.S. response and whether Iran takes action aimed at shutting down the Strait of Hormuz, Tariq Zahir, managing member at Tyche Capital Advisors, told MarketWatch on Sunday afternoon.

“We are on the cusp of this escalating, which could seriously impact the flow of crude oil,” he said.

Three U.S. service members were killed and more than two dozen injured in a drone strike on a U.S. base in northeast Jordan, according to U.S. Central Command. They were the first U.S. fatalities in months of attacks on U.S. bases by Iran-backed militias since the start of the Israel-Hamas war in October.

President Joe Biden attributed the Sunday attack to an Iran-backed militia group and said the U.S. “will hold all those responsible to account at a time and in a manner (of) our choosing.” News reports said U.S. officials were still working to conclusively identify the precise group responsible for the attack, but have assessed that one of several Iranian-backed groups is to blame.

Some congressional Republicans called for direct retaliation on Iran.

“We must respond to these repeated attacks by Iran & its proxies by striking directly against Iranian targets & its leadership. The Biden administration’s responses thus far have only invited more attacks. It is time to act swiftly and decisively for the whole world to see,” wrote Sen. Roger Wicker of Mississippi, the senior Republican on the Senate Armed Services Committee, in a post on X.

Oil futures rallied last week to their highest since November, but with gains attributed in part to production outages in the U.S. and more upbeat expectations around economic growth.

“Crude already has the wind to its back, so this will only offer further upside,” Chris Weston, head of research at Australian brokerage Pepperstone told MarketWatch in an email.

With the U.S. election later this year, “Biden needs to strike a balance between increasing aggression that potentially puts U.S. serviceman lives in danger and could potentially raise the cost of living…while also showing a defiant stance that shows his resolve against terror,” Weston said.

Oil prices have seen short-lived rallies around developments in the Middle East since the start of the Israel-Hamas war, but have failed to build in a lasting geopolitical risk premium. West Texas Intermediate crude
CL00,
+1.22%

CL.1,
+1.22%,
the U.S. benchmark, remains around $15 below its 2023 peak in the mid-$90s set in late September. Brent crude
BRN00,
+1.15%,
the global benchmark, pushed back above $80 a barrel last week.

Attacks by Iran-backed Houthi militants on Red Sea shipping have forced a rerouting of tankers and cargo ships. For crude, that’s had implications for the physical market but hasn’t interrupted the flow of crude from the Middle East.

A move by Iran aimed at closing off the Strait of Hormuz, the world’s biggest oil-transportation chokepoint, remains a top worry.

The strait is a narrow waterway that links the Persian Gulf with the Gulf of Oman and the Arabian Sea. At its narrowest point, the waterway is only 21 miles wide, and the width of the shipping lane in either direction is just two miles, separated by a two-mile buffer zone.

Energy Information Administration

Around 21 million barrels a day of crude moved through the waterway in the first half of 2023, equivalent to around a fifth of daily global consumption, according to the U.S. Energy Information Administration.

The U.S. stock market has largely looked past Middle East tensions, with the S&P 500
SPX
returning to record territory this month, while the Dow Jones Industrial Average
DJIA
has also set a series of records.

Dow futures
YM00,
-0.20%
were off 94 points, or 0.3% as Asian trading got under way, while S&P 500 futures
ES00,
-0.22%
fell 12 points, or 0.2%, and Nasdaq-100 futures
NQ00,
-0.24%
lost 0.3%.

Read: Stock-market rally faces Fed, tech earnings and jobs data in make-or-break week

Away from oil, there were no signs of a significant surge in demand for instruments that traditionally serve as havens during periods of increased geopolitical tension. Futures on U.S. Treasurys
TY00,
+0.21%
saw a modest rise of 0.2%, while the U.S. dollar
DXY
was little changed versus major rivals and gold futures
GC00,
+0.41%
ticked up 0.4%.

Escalating Middle East tensions won’t go unnoticed by traders, but probably doesn’t warrant a “solid derisking,” Weston said, particularly with investors facing a barrage of major market events in the week ahead.

For U.S.-focused investors, the week ahead features a Federal Reserve policy meeting, earnings from tech industry heavyweights and a crucial December jobs report.

The Middle East situation “won’t take us too far off the rates, growth track, but we have an eye on whether this escalates,” Weston said.

—Associated Press contributed.

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January 28, 2024
The former bond king, Bill Gross, says 10-year Treasury is ‘overvalued’

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The former bond king doesn’t like the fixed-income security that’s the lynchpin of the financial world.

Bill Gross, the retired fund manager and co-founder of Pacific Investment Management, took to the social-media service X to say that the 10-year Treasury
BX:TMUBMUSD10Y
is “overvalued” with a yield of 4%. Yields move in the opposite direction to prices.

Through Monday, the yield on the 10-year Treasury has fallen 99 basis points from its late October peak.

He said the 10-year Treasury inflation-protected yield at 1.80% is the better choice. “If you need to buy bonds. I don’t,” said Gross.

Gross also continued to talk of his idea to go long 2-year bonds
BX:TMUBMUSD02Y
while shorting the 10-year. “Stick with the return to a positive 10 year/2 year yield curve. Earns carry while you wait,” he said. In previous posts, he talked of making such trades via Treasury futures contracts.

Gross said he was taking a bow for his recommendation of regional bank stocks six months ago and mortgage REITs in December. The SPDR S&P Regional Banking ETF
KRE
has climbed 49% from its May 4 low, and the iShares Mortgage Real Estate ETF
REM
has gained 21% from its late October low. Gross in November highlighted Annaly Capital Management
NLY,
+2.62%
and AGNC Investment Corp.
AGNC,
+3.75%
as mortgage REITs he likes for 2024.

Gross said he still likes Capri Holdings
CPRI,
-0.39%
as a merger arbitrage target. Tapestry
TPR,
+2.04%
in August agreed to buy Capri for $57 per share, and on Monday, Capri closed at $50.49.

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January 9, 2024
Why stock-market investors will remain at mercy of shifting rate-cut expectations after wobbly start to 2024

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Stock investors have gotten off to a wobbly start to the new year, hobbled by shifting expectations on the timing and extent of Federal Reserve interest-rate cuts in 2024.

All three major U.S. stock indexes snapped a nine-week winning streak on Friday, after unexpectedly strong December job gains prompted traders to briefly pull back on the chances of a March rate cut. The S&P 500
SPX
and Nasdaq Composite
COMP
also failed to stage a Santa Claus Rally from the five final trading days of 2023 through the first two sessions of 2024, as questions grew about the market’s multiple rate-cuts view.

It all adds up to a glimpse of what might be in store for investors in the year ahead. Already, the so-called “January effect,” or theory that stocks tend to rise by more now than any other month, could be put to the test by headwinds that include stalling progress on inflation. Inflation’s downward trend in recent months had given traders and investors hope that as many as six or seven quarter-percentage-point rate cuts from the Federal Reserve could be delivered in 2024, starting in March.

Over the first handful of days in the new year, however, reality has started to sink in. For one thing, multiple rate cuts tend to be more commonly associated with recessions and not soft landings for the economy.

Moreover, the idea that the Fed could follow through with as many rate cuts as envisioned by traders would significantly increase the probability that policymakers lose their battle against inflation, according to Mike Sanders, head of fixed income at Wisconsin-based Madison Investments, which manages $23 billion in assets. That’s because six or more rate cuts would loosen financial conditions by too much, and boost the risk of another bout of inflation that forces officials to hike again, he said.

Minutes of the Fed’s Dec. 12-13 meeting show that policymakers were uncertain about their forecasts for rate cuts this year and failed to rule out the possibility of further rate hikes. Nonetheless, fed funds futures traders continued to cling to expectations for a big decline in borrowing costs, with the greatest likelihood now coalescing around five or six quarter-point rate cuts that total 125 or 150 basis points of easing by year-end. That’s roughly twice as much as what policymakers penciled in last month, when they voted to keep interest rates at a 22-year high of 5.25% to 5.5%.

Source: CME FedWatch Tool, as of Jan. 5.

Uncertainty over the path of U.S. interest rates could leave investors flat-footed once again, and damp the optimism that sent all three major stock indexes in 2023 to their best annual performances of the prior two to three years. In November, analysts at Deutsche Bank AG
DB,
+0.81%
counted seven times since 2021 in which markets expected the Fed to make a dovish pivot, only to be wrong.

Sources: Bloomberg, Deutsche Bank. Chart is as of Nov. 20, 2023.

Financial markets have been operating with “sky-high expectations” for 2024 rate cuts, but the only way to substantiate six cuts this year is with an “abrupt and sharp downturn in the economy,” said Todd Thompson, managing director and portfolio co-manager at Reams Asset Management in Indianapolis, which oversees $27 billion.

Heading into 2024, euphoria over the prospect of lower borrowing costs produced what Thompson calls “an alarming, everything rally,” which he says leaves equities and high-yield corporate debt vulnerable to pullbacks between now and the next six months. Beyond that period, however, “the trend is likely to be lower rates as the economy finally succumbs to tightening conditions at the same time inflation continues to recede.”

The coming week brings the next major U.S. inflation update, with December’s consumer price index report released on Thursday. The annual headline rate of inflation from CPI has slowed to 3.1% in November from a peak of 9.1% in June 2022. In addition, the core rate from the Fed’s favorite inflation gauge, known as the PCE, has eased to 3.2% year-on-year in November from a 4.2% annual rate in July.

The Fed needs to keep interest rates higher because of all the uncertainty around inflation’s most likely path forward, and the U.S. labor market “won’t degrade fast enough in the first quarter to justify a first rate cut in March,” according to Sanders of Madison Investments.

Rate-cut expectations are “going to be the issue for 2024, and a lot of it is going to be revolving around inflation getting back to that 2% target,” Sanders said via phone. “We think somewhere between 75 and 125 basis points of rate cuts make sense, and that the first move is more of a June-type of event. We don’t think it makes sense to have a March rate cut unless the labor market falls off a cliff.”

History shows that Treasury yields tend to fall in the months leading up to the first rate cut of a Fed easing cycle. However, that isn’t happening right now. Yields on government debt have been on an upward trend since the end of December, with 2-
BX:TMUBMUSD02Y,
10-
BX:TMUBMUSD10Y,
and 30-year yields
BX:TMUBMUSD30Y
ending Friday at their highest levels in more than two to three weeks.

See also: What history says about stocks and the bond market ahead of a first Fed rate cut

While financial markets generally tend to be efficient processors of information, they “haven’t been very accurate in terms of pricing in rate cuts” this time, said Lawrence Gillum, the Charlotte, North Carolina-based chief fixed-income strategist for broker-dealer for LPL Financial. He said the big risk for 2024 is if financial conditions ease too much and the Fed declares victory on inflation too soon, which could reignite price pressures in a manner reminiscent of the 1970s period under former Fed Chairman Arthur Burns.

“We think rate-cut expectations have gone too far too fast, and that the backup in yields we are seeing right now is the market acknowledging that maybe rate cuts are not going to be as aggressive as what was priced in,” Gillum said via phone.

December’s CPI report on Thursday is the data highlight of the week ahead.

On Monday, consumer-credit data for November is set to be released, followed the next day by trade-deficit figures for the same month.

Wednesday brings the wholesale-inventories report for November and remarks by New York Fed President John Williams.

Initial weekly jobless claims are released on Thursday. On Friday, the producer price index for December comes out.

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January 7, 2024
Why the 60-40 portfolio is poised to make a comeback in 2024

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Speculation that the 60-40 portfolio may have outlived its usefulness has been rife on Wall Street after two years of lackluster performance.

But as the yield on the 10-year Treasury note
BX:TMUBMUSD10Y
hovers around 4%, some strategists say the case for allocating a healthy portion of one’s portfolio to bonds hasn’t been this compelling in a long time.

And with the Federal Reserve penciling three interest-rate cuts next year, investors who seize the opportunity to buy more bonds at current levels could reap rewards for years to come, as waning inflation helps to normalize the relationship between stocks and bonds, restoring bonds’ status as a helpful portfolio hedge during tumultuous times, market strategists and portfolio managers told MarketWatch.

Add to this is the notion that equity valuations are looking stretched after a stock-market rebound that took many on Wall Street by surprise, and the case for diversification grows even stronger, according to Michael Lebowitz, a portfolio manager at RIA Advisors, who told MarketWatch he has recently increased his allocation to bonds.

“The biggest difference between 2024 and years past is you can earn 4% on a Treasury bond, which isn’t that far off from the projected return in U.S. stocks right now,” Lebowitz said. “We’re adding bonds to our portfolio because we think yields are going to continue to come down over the next three to six months.”

See: Case for traditional 60-40 mix of stocks and bonds strengthens amid higher rates, according to Vanguard’s 2024 outlook

Does 60-40 still make sense?

Since modern portfolio theory was first developed in the early 1950s, the 60-40 portfolio has been a staple of financial advisers’ advice to their clients.

The notion that investors should favor diversified portfolios of stocks and bonds is based on a simple principle: bonds’ steady cash flows and tendency to appreciate when stocks are sliding makes them a useful offset for short-term losses in an equity portfolio, helping to mitigate the risks for investors saving for retirement.

However, market performance since the financial crisis has slowly undermined this notion. The bond-buying programs launched by the Fed and other central banks following the 2008 financial crisis caused bond prices to appreciate, while driving yields to rock-bottom levels, muting total returns relative to stocks.

At the same time, the flood of easy money helped drive a decadelong equity bull market that began in 2009 and didn’t end until the advent of COVID-19 in early 2020, FactSet data show.

More recently, bonds failed to offset losses in stocks in 2022. And in 2023, U.S. equity benchmarks such as the S&P 500
SPX
have still outperformed U.S. bond-market benchmarks, despite bonds offering their most attractive yields in years, according to Dow Jones Market Data.

The Bloomberg U.S. Aggregate Total Return Index
AGG
has returned 4.6% year-to-date, according to Dow Jones data, compared with a more than 25% return for the S&P 500 when dividends are included.

But this could be about to change, according to analysts at Deutsche Bank. The team found that, going back decades, the relationship between stocks and bonds has tended to normalize once inflation has slowed to an annual rate of 3% based on the CPI Index.

DEUTSCHE BANK

The CPI Index for November had core inflation running at 4% year over year, a level it has been stuck at for the past several months. The Fed’s projections have inflation continuing to wane in 2024.

Staff economists at the central bank expect the core PCE Price Index, which the Fed prefers to the CPI gauge, to slow to 2.4% by the end of next year. If that comes to pass, investors should see the inverse relationship between stocks and bonds return, according to Lebowitz and others.

A window of opportunity

The dismal performance of 60-40 portfolios over the past two years has inspired a wave of Wall Street think pieces questioning whether it still makes sense for contemporary investors.

A team of academics led by Aizhan Anarkulova at Emory University in November presented findings showing that over a lifetime, investors would have reaped higher returns via a portfolio consisting of 100% exposure to stocks, split between foreign and domestic markets.

But fixed-income strategists at Deutsche and Goldman Sachs Group, as well as others on Wall Street, say investors wouldn’t be well-served by excluding bonds from their portfolio, particularly with yields at current levels.

Rob Haworth, senior investment strategy director at U.S. Bank’s wealth-management business, says investors now have an opportunity to lock in attractive returns for decades to come, ensuring that the bonds in their portfolios will, at the very least, deliver a steady stream of income that would reduce any losses in stocks or declines in bond prices.

There is, however, one catch: with the Fed expected to cut interest rates, that window could quickly close.

“The problem is, for investors in cash, the Fed’s just told you that is not going to last. I think that means it is time to start thinking about your long-term plan,” Haworth said.

Read: Fed could be the Grinch who ‘stole’ cash earning 5%. What a Powell pivot means for investors.

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December 20, 2023
How Fed rate moves could impact different sectors of the stock market in 2024

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Wall Street seems to agree that U.S. stocks will climb to fresh record highs in 2024. But the most important question for investors may still be the direction and speed of interest-rate moves.

Rate-sensitive groups of stocks with lackluster fundamentals, such as financials, utilities, staples, “may be able to outperform, at least early in the year,” if one expects interest rates “to come down quickly and permanently,” said Nicholas Colas, co-founder of DataTrek Research.

But if “one expects a bumpier ride on the rate front,” then stronger groups, like technology and tech-adjacent sectors “should do better,” Colas said in a Monday client note.

The S&P 500’s utilities, consumer staples and energy sectors have been the worst performing parts of the large-cap benchmark index so far in 2023, according to FactSet data.

With an over 10% year-to-date decline, the S&P 500’s utilities sector
XX:SP500.55
has significantly underperformed the broader index’s
SPX
23.6% advance.

The S&P 500’s best performing information technology sector
XX:SP500.45
was up 56.5% for the same period. But its consumer staples
XX:SP500.30
and energy
XX:SP500.10
sectors have slumped by 2.6% and 4.1% so far this year, respectively, according to FactSet data.

Utilities and consumer staples are usually considered defensive investment sectors, or “bond proxies,” because they can help investors minimize stock-market losses in any economic downturn. Companies in these sectors usually provide electricity, water and gas, or they sell products and services that consumers regularly purchase, regardless of economic conditions.

However, utilities and consumer staples stocks were under a lot of pressure this year. A relentless climb in U.S. Treasury yields in October made defensive stocks less attractive compared with government-issued bonds, or money-market funds offering 5%, especially as the economy remained strong, pushing recession expectations out further.

Colas expects “weaker groups” to catch a stronger tailwind if rates continue to decline.

See: Markets are declaring victory over inflation for Powell, and that has some economists worried

The yield on the 10-year Treasury
BX:TMUBMUSD10Y
last week booked its biggest weekly decline in a year after the Federal Reserve signaled a pivot to rate cuts in 2024, which helped the S&P 500 score its longest weekly winning streak since 2017.

The S&P 500’s utilities and consumer staples sectors rose 0.9% and 1.6% last week, respectively, compared with the information technology sector’s 2.5% advance and communication services sector’s
XX:SP500.50
0.1% decline, according to FactSet data.

Earnings growth expectations for each S&P 500 sector in 2024 are indicated below. Sectors to the left of the dotted black line are expected to show better bottom-line results than the S&P 500 as a whole, while those to the right are expected to show weaker earnings growth.

SOURCE: FACTSET, DATATREK RESEARCH

Wall Street expects next year to see 11.5% growth in S&P 500 earnings-per-share (EPS), to $244, and 5.5% revenue growth, according to FactSet data.

However, there is a wide dispersion across S&P 500 sectors. The range goes from 2% revenue and 3% earnings growth for the energy sector, to 9% revenue and 17% earnings growth for the information technology sector, according to data compiled by DataTrek Research.

“Playing fundamentally weaker sectors therefore assumes even more good news on the rate front,” Colas said, adding that it still is riskier than sticking with “tried and true groups” like technology.

Moreover, sectors such as utilities, financials and consumer staples are not expected to show 10% earnings growth next year, while health care and big tech-dominated groups like communication services, technology and consumer discretionary, are expected to show much better than average revenue and earnings growth in 2024, said Colas, citing FactSet data.

U.S. stocks closed higher on Monday, with the Dow Jones Industrial Average
DJIA
building on its all-time high set last week. The S&P 500 gained 0.5% and the Dow Industrials closed fractionally higher. The Nasdaq Composite
COMP
finished up 0.6%, according to FactSet data.

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December 18, 2023
Fed could be the Grinch who 'stole' cash earning 5%. What a Powell pivot means for investors.

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Yields on 3-month
BX:TMUBMUSD03M
and 6-month
BX:TMUBMUSD06M
Treasury bills have been seeing yields north of 5% since March when Silicon Valley Bank’s collapse ignited fears of a broader instability in the U.S. banking sector from rapid-fire Fed rate hikes.

Six months later, the Fed, in its final meeting of the year, opted to keep its policy rate unchanged at 5.25% to 5.5%, a 22-year high, but Powell also finally signaled that enough was likely enough, and that a policy pivot to interest rate cuts was likely next year.

Importantly, the central bank chair also said he doesn’t want to make the mistake of keeping borrowing costs too high for too long. Powell’s comments helped lift the Dow Jones Industrial Average
DJIA
above 37,000 for the first time ever on Wednesday, while the blue-chip index on Friday scored a third record close in a row.

“People were really shocked by Powell’s comments,” said Robert Tipp, chief investment strategist, at PGIM Fixed Income. Rather than dampen rate-cut exuberance building in markets, Powell instead opened the door to rate cuts by midyear, he said.

New York Fed President John Williams on Friday tried to temper speculation about rate cuts, but as Tipp argued, Williams also affirmed the central bank’s new “dot plot” reflecting a path to lower rates.

“Eventually, you end up with a lower fed-funds rate,” Tipp said in an interview. The risk is that cuts come suddenly, and can erase 5% yields on T-bills, money-market funds and other “cash-like” investments in the blink of an eye.

Swift pace of Fed cuts

When the Fed cut rates in the past 30 years it has been swift about it, often bringing them down quickly.

Fed rate-cutting cycles since the ’90s trace the sharp pullback also seen in 3-month T-bill rates, as shown below. They fell to about 1% from 6.5% after the early 2000 dot-com stock bust. They also dropped to almost zero from 5% in the teeth of the global financial crisis in 2008, and raced back down to a bottom during the COVID crisis in 2020.

Rates on 3-month Treasury bills dropped suddenly in past Fed rate-cutting cycles

FRED data

“I don’t think we are moving, in any way, back to a zero interest-rate world,” said Tim Horan, chief investment officer fixed income at Chilton Trust. “We are going to still be in a world where real interest rates matter.”

Burt Horan also said the market has reacted to Powell’s pivot signal by “partying on,” pointing to stocks that were back to record territory and benchmark 10-year Treasury yield’s
BX:TMUBMUSD10Y
that has dropped from a 5% peak in October to 3.927% Friday, the lowest yield in about five months.

“The question now, in my mind,” Horan said, is how does the Fed orchestrate a pivot to rate cuts if financial conditions continue to loosen meanwhile.

“When they begin, the are going to continue with rate cuts,” said Horan, a former Fed staffer. With that, he expects the Fed to remain very cautious before pulling the trigger on the first cut of the cycle.

“What we are witnessing,” he said, “is a repositioning for that.”

Pivoting on the pivot

The most recent data for money-market funds shows a shift, even if temporary, out of “cash-like” assets.

The rush into money-market funds, which continued to attract record levels of assets this year after the failure of Silicon Valley Bank, fell in the past week by about $11.6 billion to roughly $5.9 trillion through Dec. 13, according to the Investment Company Institute.

Investors also pulled about $2.6 billion out of short and intermediate government and Treasury fixed income exchange-traded funds in the past week, according to the latest LSEG Lipper data.

Tipp at PGIM Fixed Income said he expects to see another “ping pong” year in long-term yields, akin to the volatility of 2023, with the 10-year yield likely to hinge on economic data, and what it means for the Fed as it works on the last leg of getting inflation down to its 2% annual target.

“The big driver in bonds is going to be the yield,” Tipp said. “If you are extending duration in bonds, you have a lot more assurance of earning an income stream over people who stay in cash.”

Molly McGown, U.S. rates strategist at TD Securities, said that economic data will continue to be a driving force in signaling if the Fed’s first rate cut of this cycle happens sooner or later.

With that backdrop, she expects next Friday’s reading of the personal-consumption expenditures price index, or PCE, for November to be a focus for markets, especially with Wall Street likely to be more sparsely staffed in the final week before the Christmas holiday.

The PCE is the Fed’s preferred inflation gauge, and it eased to a 3% annual rate in October from 3.4% a month before, but still sits above the Fed’s 2% annual target.

“Our view is that the Fed will hold rates at these levels in first half of 2024, before starting cutting rates in second half and 2025,” said Sid Vaidya, U.S. Wealth Chief Investment Strategist at TD Wealth.

U.S. housing data due on Monday, Tuesday and Wednesday of next week also will be a focus for investors, particularly with 30-year fixed mortgage rate falling below 7% for the first time since August.

The major U.S. stock indexes logged a seventh straight week of gains. The Dow advanced 2.9% for the week, while the S&P 500
SPX
gained 2.5%, ending 1.6% away from its Jan. 3, 2022 record close, according to Dow Jones Market Data.

The Nasdaq Composite Index
COMP
advanced 2.9% for the week and the small-cap Russell 2000 index
RUT
outperformed, gaining 5.6% for the week.

Read: Russell 2000 on pace for best month versus S&P 500 in nearly 3 years

Year Ahead: The VIX says stocks are ‘reliably in a bull market’ heading into 2024. Here’s how to read it.

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December 17, 2023
S&P 500's year-end rally lifts 51 stocks to a record close

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It has been a record day for 10% of the S&P 500.

A group of 51 stocks in the benchmark equity index swept to record finishes on Tuesday, the most since April 20, 2022, according to a tally from Dow Jones Market Data.

It was a record day for 51 stocks in the S&P 500.

Dow Jones Market Data

Stocks that logged a record close on Tuesday included Allstate Corp
ALL,
+0.90%,
Costco Wholesale
COST,
+0.90%,
D.R. Horton, Inc.
DHI,
+0.65%,
Mastercard
MA,
+1.21%,
T-Mobile US Inc.,
TMUS,
+1.00%
Visa Inc.
V,
+1.19%
and Waste Management Inc.,
WM,
+1.85%
among others.

Equities have been in a year-end rally mode, driven higher by tumbling benchmark yields that finance much of the U.S. economy and expectations of coming interest-rate cuts.

The 10-year Treasury rate
BX:TMUBMUSD10Y
fell to 4.2% on Tuesday from a high of about 5% in October.

The Dow Jones Industrial Average
DJIA
on Tuesday ended at its third-highest level on record, while the S&P 500 index
SPX
and Nasdaq Composite Index
COMP
added to a string of new closing highs for 2023. The Dow finished 0.6% away from its record close logged almost two years ago, while the S&P 500 was only 3.2% below its close from the same period, according to Dow Jones Market Data.

The push higher for stocks followed inflation data for November that showed price pressures continued to ease from peak levels, but still were above the Fed’s 2% annual target.

The consumer-price index pegged the annual rate of inflation at 3.1%, down from 3.2% in October, with the “last mile” of inflation expected to be the hardest part to tame.

Investors now will be focused on Wednesday’s Federal Reserve decision. Short-term interest rates are expected to remain unchanged at a 22-year high, but the central bank is expected to update its “dot plot” forecast of rates over a longer time horizon.

“Although the market will focus on the timing of rate cuts, we suspect Chair Powell will be keen to strike notes of caution to avoid financial conditions easing too much further to ensure the Fed continues to see encouraging progress on inflation,” said Emin Hajiyev, senior economist at Insight Investment, in emailed comments.

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December 12, 2023
U.S. stocks open mixed as investors weigh fresh data on inflation

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U.S. stocks opened mixed on Tuesday as investors weighed a reading on inflation that was largely in line with economists’ forecasts. The Dow Jones Industrial Average
DJIA,
+0.35%
was up less than 0.1% soon after the opening bell, while the S&P 500
SPX,
+0.07%
slipped 0.2% and the Nasdaq Composite
COMP,
+0.07%
fell 0.1%, according to FactSet data, at last check. The Bureau of Labor Statistics said Tuesday that inflation, as measured by the consumer-price index, rose 0.1% in November for a year-over-year rate of 3.1%. Economists polled by the Wall Street Journal had forecast that inflation would be unchanged in November while rising at an annual pace of 3.1%. So-called core inflation, which excludes energy and food prices, climbed 0.3% last month to increase 4% in the 12 months through November. That was in line with economists’ expectations. In the bond market, the yield on the 10-year Treasury note
TMUBMUSD10Y,
4.234%
was up one basis point at around 4.24%, according to FactSet data, at last check.

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December 12, 2023
This week's Fed meeting could slam brakes on year-end stock rally

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The rally lifting U.S. stocks to fresh 2023 highs in the year’s home stretch could be at risk if the Federal Reserve on Wednesday crushes expectations for interest-rate cuts in 2024.

U.S. central bankers and investors haven’t exactly been seeing eye-to-eye about when the Fed will start easing its monetary policy, according to Melissa Brown, senior principal of applied research at Axioma.

Traders also have been flip-flopping on their forecasts for rate cuts over the past few months, based on fed-funds futures data.

Oxford Economics/Bloomberg

Given the whipsaw of recent volatility, it isn’t hard to imagine a jittery market backdrop as investors wait to hear from Fed Chairman Jerome Powell on Wednesday, even though the central bank isn’t expected to change its range for short-term interest rates. Since July, the Fed funds rate rate has been at a 22-year high in a 5.25% to 5.5% range.

U.S. stocks advanced this year after a bruising 2022, adding big gains in November, as benchmark 10-year Treasury yields
BX:TMUBMUSD10Y
tumbled from a 16-year high of 5%. The Dow Jones Industrial Average
DJIA
closed on Friday only 1.5% away from its record close nearly two years ago. The S&P 500 index
SPX
booked its highest finish since March 2022, according to Dow Jones Market Data.

Year Ahead: The VIX says stocks are ‘reliably in a bull market’ heading into 2024. Here’s how to read it.

“I don’t see any report on the horizon that would really make them [the Fed] change their stance on where we are on monetary policy,” said Alex McGrath, chief investment officer at NorthEnd Private Wealth. It is mostly the expectation of Fed rate cuts next year that have supported stock and bond markets rallies recently, he said.

The Dow Jones closed 9.4% higher on the year through Friday, the S&P 500 was up 19.9% and the Nasdaq Composite advanced 37.6% for the same period, according to FactSet data.

“We have been a little skeptical of the market’s excitement over rate cuts early next year,” said Ed Clissold, chief U.S. strategist at Ned Davis Research.

It takes a gradual process for the Fed to move away from its monetary policy tightening, Clissold told MarketWatch. The Fed is likely to pivot its tone from being very hawkish to neutral, remove the tightening bias, and then talk about rate cuts, noted Clissold.

The bond market on Friday already was again flashing signs of a potential rethink by investors about the path of interest rates in 2024.

Junk bonds
JNK

HYG,
often a canary in the coal mine for markets, hit pause on a rally that started in late October as benchmark borrowing costs fell, even though the sector has benefited from big inflows of funds in recent weeks.

Treasury yields for 10-year and 30-year
BX:TMUBMUSD30Y
bonds also shot higher Friday, echoing volatility that took hold in mid-October.

Read: Investors have fought a 2-year battle with the bond market. Here’s what’s next.

Mike Sanders, head of fixed income at Madison Investments, has been similarly cautious. “I think the market is a little too aggressive in terms of thinking that cuts are going to occur in March,” Sanders said. It is more likely that the Fed will start cutting rates in the second half of next year, he said.

“I think the biggest thing is that the continued strength in the labor market continues to make the services inflation stickier,” Sanders said. “Right now we just don’t see the weakness that we need to get that down.”

Friday’s U.S. employment report adds to his concerns. About 199,000 new jobs were created in November, the government said Friday. Economists polled by the Wall Street Journal had forecast 190,000 jobs. The report also showed rising wages and a retreating unemployment rate to a four-month low of 3.7% from 3.9%.

The U.S. central bank will likely “try their best to push back on the narrative of cuts coming very soon,” Sanders said. That could be accomplished in its updated “dot plot” interest rate forecast, also due Wednesday, which will provide the Fed’s latest thinking on the likely path of monetary policy. The Fed’s update in September surprised some in the market as it bolstered the central bank’s stance of higher rates for longer.

There’s still a chance that inflation will reaccelerate, Sanders said. “The Fed is worried about the inflation side more than anything else. For them to take the foot off the brake sooner, it just doesn’t do them any good.”

Ahead of the Fed decision, an inflation update is due Tuesday in the November consumer-price index, while the producer-price index is due Wednesday.

Still, seasonality factors could aid the stock market in December. The Dow Jones Industrial Average in December rises about 70% of the time, regardless of whether it is in a bull or bear market, according to historical data.

See: Stock market barrels into year-end with momentum. What that means for December and beyond.

“The overall market outlook remains constructive,” said Ned Davis’s Clissold. “A soft landing scenario could support the bull market continuing.”

Last week the Dow eked out a gain of less than 0.1%, the S&P 500 edged up 0.2% and the Nasdaq rose 0.7%. All three major indexes went up for a sixth straight week, with the Dow logging its longest weekly winning streak since February 2019, according to Dow Jones Market Data.

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December 10, 2023
S&P 500 ends at 2023 high, books longest weekly win streak in 4 years

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U.S. stocks closed higher on Friday, shaking off earlier weakness after a strong monthly jobs report, to clinch a sixth straight week in a row of gains. The Dow Jones Industrial Average
DJIA,
+0.36%
advanced about 130 points, or 0.4%, to end near 36,247, according to preliminary FactSet data. The S&P 500 index gained 0.4% Friday and the Nasdaq Composite finished 0.5% higher. A string of weekly gains propelled the S&P 500 index
SPX,
+0.41%
to a fresh 2023 closing high and left the Dow about 1.4% away from its record close set nearly two years ago, according to Dow Jones Market Data. Equities have benefitted from a risk-on tone going into year end, which has been driven by falling 10-year Treasury yields
TMUBMUSD10Y,
4.230%
and optimism around the Federal Reserve potentially cutting interest rates in the year ahead. That hinges on if inflation continues to ease. November’s robust jobs report served as a reminder Friday of the tough path of the “last mile” in getting inflation down to the Fed’s 2% annual target. As part of this, the 10-year Treasury yield jumped about 11.5 basis points Friday to 4.244%, but still was about 74 basis points lower than its October high. For the week, the Dow was only fractionally higher, the S&P 500 gained 0.2% and the Nasdaq climbed 0.7%.

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December 8, 2023
Mortgage rates' dip to 7% could be brief if jobs market stays strong, Fannie Mae economist says

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November’s sharp pullback in 30-year fixed mortgage rates may not last if the labor market remains strong, said Mark Palim, deputy chief economist at Fannie Mae.

Palim was speaking to the robust jobs report released on Friday, showing the U.S. added 199,000 jobs in November and that wages rose, albeit with the figures somewhat inflated by the return of striking workers from the auto industry and from Hollywood.

Homebuyers can benefit from a robust labor market and the near 80 basis point decline in mortgage rates since the end of October, Palim said. But if the “labor markets remain this strong, we believe the pace of mortgage rate declines will likely not continue in the near term or may partially reverse,” he said in a statement.

The benchmark 30-year fixed mortgage rate was edging down to 7.05% on Friday, after surging to nearly 8% in October, according to Mortgage Daily News.

Optimism around the potential for falling mortgage costs to thaw home sales helped lift shares of Toll Brothers Inc.,
TOL,
+1.86%
and a slew of other homebuilders tracked by the SPDR S&P Homebuilders ETF,
XH,
to record highs earlier this week, even while investors in some homebuilder bonds have been sellers in recent weeks.

Yields on 10-year
BX:TMUBMUSD10Y
and 30-year Treasury notes
BX:TMUBMUSD30Y
were up sharply Friday, to about 4.23% and 4.32%, respectively, but still below the highs of about 5% in October. The surge in long-term borrowing costs was stoked by tough talk by Federal Reserve officials about the need to keep rates higher for longer to bring inflation down to a 2% annual target.

Read: Solid job growth, sharp wage gains sends Treasury yields up by the most in months

U.S. stocks were up Friday afternoon, shaking off earlier weakness following the jobs report. The Dow Jones Industrial Average
DJIA
was 0.2% higher, further narrowing the gap between its last record close set two years ago, the S&P 500 index
SPX
and the Nasdaq Composite Index
COMP
also were up 0.2%, according to FactSet data.

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December 8, 2023
U.S. stocks end higher after job report, and Dow scores longest weekly winning streak since February 2019
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U.S. stocks closed higher Friday, with the Dow Jones Industrial Average scoring its longest weekly winning streak since February 2019, as investors digested the latest job report.

How stock indexes traded
- The Dow Jones Industrial Average
  DJIA
  rose 130.49 points, or 0.4%, to close at 36,247.87, its highest closing value since Jan. 12, 2022.
- The S&P 500
  SPX
  gained 18.78 points, or 0.4%, to finish at 4,604.37, marking its highest close since March 29, 2022.
- The Nasdaq Composite
  COMP
  climbed 63.98 points, or 0.4%, to end at 14,403. 97, scoring its highest closing value since April 4, 2022.
For the week, the Dow eked out a gain of less than 0.1%, the S&P 500 edged up 0.2% and the Nasdaq advanced 0.7%. All three major indexes rose for a sixth straight week, according to Dow Jones Market Data.
What drove markets

U.S. stocks ended higher Friday as investors parsed a stronger-than-expected job report.

The U.S. Bureau of Labor Statistics said Friday that the economy added 199,000 jobs in November, while the unemployment rate fell to 3.7% from 3.9%. Economists polled by the Wall Street Journal had forecast that 190,000 jobs would be added in the month.

“It’s nice to see that a soft landing still can take place,” Yung-Yu Ma, chief investment officer at BMO Wealth Management, said by phone Friday. But the market had been getting “too optimistic” about potential interest-rate cuts by the Federal Reserve in the early part of next year, he added.

The job report is “perhaps a wash” for markets as “average hourly earnings growth came in a little on the high side,” Ma said. That could contribute to inflationary pressures and push a Fed pivot on rate cuts further out in 2024 than markets were expecting.

“The Fed can probably be patient for a while,” he said. Fed Chair Jerome Powell may “strike a bit more of a hawkish tone” after the central bank’s monetary-policy meeting next week, potentially pushing back against some of the enthusiasm for earlier rate cuts, Ma said.

Average hourly earnings rose 0.4% in November, up 4% year over year, the job report shows.

“Even though the headline 199,000 new jobs created is just slightly above consensus estimates for 190,000 new positions, the lower unemployment rate of 3.7%, coupled with higher-than-expected average hourly earnings, caused a jump higher in Treasury yields,” Quincy Krosby, chief global strategist at LPL Financial, said in emailed comments.

The yield on the 10-year Treasury note
BX:TMUBMUSD10Y
climbed 11.5 basis points Friday to 4.244%, according to Dow Jones Market Data. That’s below its high this year of about 5% in October.

Meanwhile, the stock market’s so-called fear gauge remained low, with the CBOE Volatility Index
VIX
declining to 12.35 on Friday, FactSet data show.

See: The VIX says stocks are ‘reliably in a bull market’ heading into 2024. Here’s how to read it.

In other economic data released Friday, the University of Michigan’s gauge of consumer sentiment rose to a preliminary reading of 69.4 in December, its first increase in five months. Inflation expectations also moderated, the university’s survey of consumer sentiment showed.

Such a big swing for a single reading of the survey is unusual, said Claudia Sahm, a former Federal Reserve economist who now runs a consulting business. “These data usually don’t move like that,” she said during a phone interview with MarketWatch.

Next week’s economic calendar will include a reading on U. S. inflation from the consumer-price index as well as the outcome of the Fed’s two-day policy meeting, scheduled to conclude Dec. 13.

Meanwhile, the S&P 500 notched a sixth straight week of gains, its longest such winning streak since the stretch ending Nov. 15, 2019, according to Dow Jones Market Data. The Dow Jones Industrial Average logged its longest stretch of weekly gains since February 2019.

Companies in focus

Lululemon Athletica Inc. shares
LULU,
+5.37%
jumped 5.4% after the company late Thursday called for lower-than-expected holiday-quarter figures, saying that is navigating an “uncertain” economy.

Carrier Global Corp.’s stock
CARR,
+4.50%
rose 4.5% after the company announced the sale of its Global Access Solutions business to Honeywell International for $4.95 billion.

Mullen Automotive Inc. shares
MULN,
-5.13%
dropped 5.1% after the electric-vehicle maker filed a lawsuit against a group of investors for allegedly using “spoofing” to manipulate its share price.

Steve Goldstein contributed.
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December 8, 2023
November's rally just erased two months of Fed tightening, economist says

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Financial conditions are now looser than in September, says economist

Financial conditions in the U.S. are looser than in September, says economist.

Getty Images

The feel-good tone gripping markets in the home stretch of 2023 may not be what the Federal Reserve had penciled in for the holidays.

The stock market in December, once again, has been knocking on the door of record levels, driven by optimism about easing inflation and potential Fed rate cuts next year.

But while the prospect of double-digit equity gains this year would be a reprieve for investors after a brutal 2022, the latest rally also points to looser financial conditions.

Ultimately, the risk of looser financial conditions is that they could backfire, particularly if they rub against the Fed’s own goal of keeping credit restrictive until inflation has been decisively tamed.

Read: Inflation is falling but interest rates will be higher for longer. Way longer.

Specifically, the November rally for the S&P 500 index
SPX
can be traced to the 10-year Treasury yield
BX:TMUBMUSD10Y
dropping to 4.1% on Thursday from a 16-year peak of 5% in October.

Falling 10-year Treasury yields from a 5% peak in October coincides with a sharp rally in the S&P 500 at the tail end of 2023.

Oxford Economics

The Fed only exerts direct control over short-term rates, but 10-year and 30-year Treasury yields
BX:TMUBMUSD30Y
are important because they are a peg for pricing auto loans, corporate debt and mortgages.

That makes long-term rates matter a lot to investors in stocks, bonds and other assets, since higher rates can lead to rising defaults, but also can crimp corporate earnings, growth and the U.S. economy.

Michael Pearce, lead U.S. economist at Oxford Economics, thinks the November rally may put Fed officials in a difficult spot ahead of next week’s Dec. 12 to 13 Federal Open Market Committee meeting — the eighth and final policy gathering of 2023.

“The decline in yields and surge in equity prices more than fully unwinds the tightening in conditions seen since the September FOMC meeting,” Pearce said in a Thursday client note.

The Fed next week isn’t expected to raise rates, but instead opt to keep its benchmark rate steady at a 22-year high in a 5.25% to 5.5% range, which was set in July. The hope is that higher rates will keep bringing inflation down to the central bank’s 2% annual target.

Ahead of the Fed’s July meeting, stocks were extending a spring rally into summer, largely driven by shares of six meg-cap technology companies and AI optimism.

From June: Nvidia officially closes in $1 trillion territory, becoming seventh U.S. company to hit market-cap milestone

Rates in September were kept unchanged, but central bankers also drove home a “higher for longer” message at that meeting, by penciling in only two rate cuts in 2024, instead of four earlier. That spooked markets and triggered a string of monthly losses in stocks.

Pearce said he expects the Fed next week to “push back against the idea that rate cuts could come onto the agenda anytime soon,” but also to “err on the side of leaving rates high for too long.”

That might mean the first rate cut comes in September, he said, later than market odds of a 52.8% chance of the first cut in March, as reflected by Thursday by the CME FedWatch Tool.

Stocks were higher Thursday, poised to snap a three-session drop. A day earlier, the S&P 500 closed 5.2% off its record high set nearly two years ago, the Dow Jones Industrial Average
DJIA
was 2% away from its record close and the Nasdaq Composite Index
COMP
was almost 12% below its November 2021 record, according to Dow Jones Market Data.

Related: What investors can expect in 2024 after a 2-year battle with the bond market

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December 7, 2023
Why the U.S. economy isn't out of the woods as stock market soars

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A rally in the U.S. stock and bond markets in the past week defied the bears and fueled hopes for more gains to come by year-end and in 2024 as Wall Street bought into the idea that the economy will pull off a “soft landing” after a run of interest-rate hikes by the Federal Reserve.

But market skeptics are putting investors on alert that the “soft-landing” scenario is still at risk with consumer spending and job growth slowing, along with corporate earnings.

“The equity market is misguided,” said Josh Schachter, senior portfolio manager at Easterly Investment Partners, in a phone interview with MarketWatch. “The markets are behaving in almost a bipolar fashion — some asset classes such as bonds
BX:TMUBMUSD10Y,
oil
BRN00,
-0.29%,
and dollar
DXY,
are being priced for a recession, while other assets such as equities and bitcoin
BTCUSD,
+2.16%,
are priced risk-on.”

U.S. stocks built on their November gains in the past week, with the S&P 500 index
SPX
ending at new 2023 high on Friday and the Dow Jones Industrial Average
DJIA
logging its fifth week in the green. The rebound in stocks was due in part to bond investors starting to believe the Fed is done raising interest rates and is likely to begin cutting them by the first quarter of 2024.

Meanwhile, the narrative that a resilient labor market and steadier-than-expected economic growth should keep a recession at bay has gained traction, bolstering the “goldilocks” scenario for the financial markets.

See: These two leading indicators suggest a U.S. recession has already begun, according to Wall Street’s favorite permabear

However, signs are emerging that consumer spending, which accounts for about 70% of the U.S. economic output and has boosted the economy this year, has likely run its course following the post-pandemic recovery. Credit card and car loan delinquency rates are rising, student loan payments have resumed, consumer spending is cooling, and there are warnings from top retailers.

Joseph Quinlan, head of CIO market strategy for Merrill and Bank of America Private Bank, said the “softness” in the U.S. consumer sector is visible but not huge, referring to that as “a canary in a coal mine,” he told MarketWatch via phone on Thursday.

The pullback in consumer spending is welcome news for Fed officials, who have increased interest rates 11 times since March 2022 to get inflation back to its preferred target of 2%. However, some analysts are worried that high interest rates and a decline in pandemic savings could eventually translate to weaker consumers in 2024, potentially another sign of a long-predicted slowdown in the U.S. economy.

“One of the things I’m most concerned about is consumers’ ability to continue to pace the economy — you’ve got several headwinds that haven’t really borne completely out yet,” said Jason Heller, senior executive vice president at Coastal Wealth. “Does the consumer continue to behave the way they behaved the last 36 months? I think you will eventually see a slowdown in consumer spending which is going to mandate a slowdown in the labor market.”

Lauren Goodwin, economist and portfolio strategist at New York Life Investments, acknowledged that a modest slowdown in inflation and employment growth means that a “Fed relief rally” in stocks can be sustained, but her concern is this late-cycle limbo is no different than those of the past, which is a moment of “goldilocks” before the very reason that inflation is moderating — slowing economic growth and employment — becomes clear in the data.

See: ‘We Are Still Headed for a Pretty Hard Landing,’ Ex-Treasury Secretary Larry Summers Says

That’s why the November employment report, which will be released by the Bureau of Labor Statistics next Friday at 8:30 a.m. Eastern, will be key for investors to watch. The U.S is expected to add 172,500 jobs in November after a 150,000 increase in the prior month, according to economists polled by Dow Jones. The percentage of jobless Americans seeking work is forecast to stay the same at 3.9%, leaving it at the highest level since the beginning of 2022.

See: U.S. job growth pick up on the radar this coming week

In fact, nonfarm payroll report publication days have been among the most volatile for stocks in 2023, compared with the release of monthly consumer-price index readings, which sparked some of the biggest daily up and down moves for the S&P 500 and other major indexes in 2022.

See also: Do CPI days still rock the stock market? How 2023 stacks up to 2022

This year, the S&P 500 saw an absolute average percentage change of 1.12% on employment situation release dates, compared with an average percentage move of 0.64% on CPI days, according to figures compiled by Dow Jones Market Data.

That said, analysts are skeptical if the employment data is able to tell “a radically different story” but suggest the labor market will remain relatively tight into 2024, said Quinlan and Lauren Sanfilippo at Merrill and Bank of America Private Bank, in a phone interview.

See: What 2024 S&P 500 forecasts really say about the stock market

Too much optimism in 2024 earnings growth

Corporate America and their shares are telling investors a different story about next year.

With an estimated average S&P 500 earnings growth of 11.7% next year, the U.S. stock market is nowhere near recessionary concerns, said Heller. “We’ve [the stocks] priced in pretty significant growth in 2024.”

Strategists at Merrill and Bank of America Private Bank are in the camp of expecting a “mid-single digit” earnings growth for the S&P 500 in 2024, as earnings have troughed and the economy will fall back to the 2%-level of real growth after high rates confine consumer spending and corporate profits, cooling a red-hot economy.

To be sure, Wall Street analysts tend to overestimate the earnings-per-share (EPS) for the S&P 500, said John Butters, senior earnings analyst at FactSet.

The current bottom-up EPS estimate for the S&P 500 in 2024 is $246.30. If that holds true, that would be the highest EPS number reported by the large-cap index since FactSet began tracking this metric in 1996.

However, over the past 25 years, the average difference between the EPS estimate at the beginning of the year and the actual EPS number has been 6.9%, meaning analysts on average have overestimated the earnings one year in advance, said Butters in a Friday note (see chart below).

SOURCE: FACTSET

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December 3, 2023
Dow posts highest close in nearly 2 years, equities extend rally to five straight weeks

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U.S. stocks powered higher on Friday, shrugging off tough talk from Federal Reserve Chairman Jerome Powell about it being too early to talk about rate cuts. The Dow Jones Industrial Average
DJIA,
+0.82%
gained about 294 points, or 0.8%, ending near 36,245, according to preliminary FactSet data. The S&P 500 index
SPX,
+0.59%
rose 0.6%, while the Nasdaq Composite Index
COMP,
+0.55%
gained 0.6%. All three indexes also ended the week higher for five straight weeks. The gains allowed the Dow to clinch its highest close since since January 2022, while the S&P 500 finished at its highest level since March 2022, according to Dow Jones Market Data. The powerful rally in equities since early November has been attributed to easing inflation, falling long-term Treasury yields and expectations for rate cuts next year The 10-year Treasury yield
TMUBMUSD10Y,
4.200%
fell to 4.225% on Friday, after hitting 5% in October, ending the week at its lowest yield since early September, according to DJMD.

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December 1, 2023
Dow Jones ends about 80 points higher as U.S. bond yields keep falling

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U.S. stocks posted modest gains on Tuesday, resuming a strong rally in November that has been propelled by tumbling U.S. bond yields. The Dow Jones Industrial Average DJIA closed up about 83 points, or 0.2%, ending near 35,416, according to preliminary FactSet data. The S&P 500 index SPX was 0.1% higher, while the Nasdaq Composite Index COMP closed up 0.3%. Equity investors were emboldened after Fed Governor Christopher Waller said on Tuesday that a cooling economy could help bring inflation down to the central bank’s 2% yearly target, even though he also said it’s unclear if more interest rate hikes were warranted. The…

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November 28, 2023
Stock market is gaining momentum. What that means for December and beyond.

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Barring a sudden bout of post-Thanksgiving indigestion, the U.S. stock market looks poised to log a healthy November rally. And while there are certainly no guarantees, history says momentum is likely to beget momentum into year-end.

“I think the market is set up for a strong final six weeks of 2023 and I would expect the market to build on that momentum into year-end,” said Michael Arone, chief investment strategist at State Street, in a phone interview.

Drivers…

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November 26, 2023
Foreign investors may have bailed out of Treasurys at exactly the wrong time

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Foreign investors dumped U.S. Treasury debt in September for the first time since May 2021, but it’s possible these sellers are already regretting it, according to one prominent Wall Street economist.

The latest installment of the Treasury Department’s monthly reports on buying and selling of U.S. securities by foreign investors — by both central banks and other official parties and private institutions and individuals — showed they sold $1.7 billion in Treasurys on a net basis. That marked the first time foreign investors…

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November 17, 2023
How financial conditions might play into Fed’s thinking after October’s CPI

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Financial markets were jubilant over Tuesday’s data showing that U.S. consumer prices eased by more than expected in October, with Treasury yields plummeting on expectations the Federal Reserve will refrain from raising interest rates further and might even lower borrowing costs.

In a nutshell, financial conditions suddenly became looser, with the benchmark 10-year yield
BX:TMUBMUSD10Y
at 4.46% in New York afternoon trading or down by more than half a percentage point from its October peak. Right now, conditions are “much more accommodative” than when Fed officials first suggested higher long-term yields could do the work of tighter monetary policy and take the place of a rate hike, according to Will Compernolle, a macro strategist for FHN Financial in New York.

The jury is out on how much a continuation of looser financial conditions will matter to central bankers. At one point in Tuesday’s session, both the 10-year yield and the policy-sensitive 2-year yield
BX:TMUBMUSD02Y
were heading for their biggest one-day declines in more than six months as traders revved up expectations for at least four Fed rate cuts in 2024.

Tuesday’s October CPI inflation report “will be very welcome to the Fed, though it will inevitably make the Fed’s challenge of restraining market optimism and financial conditions more difficult too,” according to New York-based advisory firm Evercore ISI.

In a note, Evercore’s Vice Chairman Krishna Guha and others wrote that “the Fed’s challenge is that the market sees this and is trying to jump to the endgame, risking a larger/sooner easing in financial conditions than the Fed itself would like to see under prudent upside inflation risk management principles. So expect Fed officials to maintain a very cautious and relatively hawkish tone.”

Indeed, there’s plenty of reasons to remain careful about reading too much into one report.

After Tuesday’s data, Federal Reserve Bank of Richmond President Thomas Barkin said he’s not convinced inflation is on a clear path toward 2% despite recent progress in curbing price pressures.

Some economists also said October’s CPI report isn’t the game changer that markets think it is. And FHN’s Compernolle said that if the Fed’s favorite inflation gauge, the personal consumption expenditures index (PCE), shows “horizontal momentum” when the October data is released later this month, there could be some on the Federal Open Market Committee “who feel the lower bond yields necessitate a higher fed funds rate.”

Read: Economists in hawkish camp don’t surrender in wake of October consumer-inflation print

At Hirtle Callaghan & Co., a West Conshohocken, Pa.-based firm which manages $18.5 billion in assets, Brad Conger, deputy chief investment officer, said that October’s CPI readings validate the Fed’s “wait-and-see” approach and that “it will take a rather long series of this order of magnitude to give them confidence to ease policy.”

Meanwhile, “we worry that the recent easing of financial conditions and energy prices could easily start to counter the restraint,” Conger wrote in an email on Tuesday.

In addition to a broad-based decline in Treasury yields, all three major U.S. stock indexes
DJIA

SPX

COMP
were higher as of Tuesday afternoon. The Dow Jones Industrial Average surged almost 500 points on a buying frenzy as investors also cheered Tuesday’s low “supercore” inflation figure that acts as a proxy for labor costs.

Just last week, Fed Chairman Jerome Powell said that the Fed is wary of “head fakes” from inflation, or temporary improvements that only reverse over time.

If Tuesday’s CPI data for October isn’t a “head fake,” “the Fed may be able to accept a loosening of financial conditions in order to prevent a recession,” said Lawrence Gillum, a Charlotte, North Carolina-based fixed-income strategist for broker-dealer for LPL Financial. “If it is a head fake, then the Fed will talk up the need for higher long-end yields. It will probably take a couple more months of this type of report or better to see whether that plays out.”

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November 14, 2023
How stock-market investors can ride out a ‘fear cycle’ as S&P 500, Nasdaq fall into correction

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Many people like to feel at least a little bit of fright.

That has been the whole point of Halloween for ages. The spooky traditions might even be a sort of hedge, a way to limit carnage should darker days lurk around the corner.

Where it gets trickier is when fear impacts a nest egg, retirement fund or portfolio holdings. And fear of looming mayhem has been higher in October, with a sharp selloff causing the S&P 500 index
SPX
to break below the 4,200 level, landing it in a correction on Friday. It also joined the Nasdaq Composite Index in falling at least 10% from a summer peak.

In addition, a brutal bond-market rout has pushed the 10-year and 30-year Treasury yields
BX:TMUBMUSD10Y
up dramatically, with both recently dancing around the 5% level, which can drive up borrowing costs for the U.S. economy and cause havoc in financial markets.

“Round numbers matter,” said Rich Steinberg, chief market strategist at The Colony Group, which has $20 billion in assets under management. He said the backdrop has investors trying to figure out “where to put money” and wanting to know “where can we hide?”

“When you get into a fear cycle, the dynamics can get out of whack with reality,” Steinberg said. He thinks investors won’t go wrong earning roughly 5.5% on shorter term risk-free Treasurys, while penciling in stock prices they like.

“That’s where investors really get rewarded over the long-term,” he said, granted they have enough liquidity to ride out what could be elongated patches of volatility.

Increasingly, investor worries tie back to U.S. government spending, with the Treasury Department early next expected to release an estimated $1.5 trillion borrowing need to accommodate a large budget deficit. That would unleash even more Treasury supply into an unsettled market, and potentially strain the plumbing of financial markets.

Higher U.S. bond yields threaten to make it more expensive for the federal government to service its debt load, but they also can be prohibitive for companies, sparking layoffs and defaults.

Fed decisions, yields

The Federal Reserve is expected to hold its policy interest rates steady on Wednesday following its two-day meeting, keeping the rate at a 22-year high in the 5.25%-5.5% range.

The real fireworks, however, often appear during Fed Chairman Jerome Powell’s afternoon press conference following each rate decision.

“I firmly believe they are done for good,” said Bryce Doty, a senior portfolio manager at Sit Investment Associates, of Fed hikes in this cycle, which he notes should set up bond funds for a banner 2024, after two rough years, given today’s higher starting yields.

Yet, Doty also sees two “wild cards” that could rattle markets. Heavy Treasury debt issuance could overwhelm liquidity in the marketplace, causing yields to go up higher and potentially force the Fed to restart its bond-buying program, he said.

War abroad also could expand, including with the Israel-Hamas conflict, which could spark a flight to quality and push down U.S. bond yields.

With that backdrop, Doty suggests adding duration in bonds
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as longer-term yields rise above short-term yields, and the so-called Treasury yield curve gets steeper. “This is the time,” he said. Investors should “keep marching” out on the curve as it steepens.

“Yields, in my mind, have been the main challenge for the equity market,” said Keith Lerner, chief markets strategist at Truist Advisory Services, while noting that stocks have been wobbly since the 10-year Treasury yield topped 4% in July.

Lerner also said the near 17% drop in the powerful “Magnificent Seven” stocks, while notable, isn’t as bad as in some other S&P 500 index sectors, like real estate, were the retrenchment is closer to 20%.

“We’ve had a pretty good reset,” he said, adding that lower stock prices provide investors with “somewhat better compensation” for the uncertainties ahead.

“This is one of the most challenging investment environments we’ve seen in a long time,” said Cameron Brandt, director of research at EPFR, which tracks fund flows across asset classes.

With that backdrop, he expects investors to keep more dry powder on hand through the end of this year than in the past.

The Dow Jones Industrial Average
DJIA
shed 2.1% for the week and closed at its lowest level since the March banking crisis. The S&P 500 lost 2.5% for the week and the Nasdaq Composite fell 2.6% for the week.

Another big item on the calendar for next week, beyond the Treasury borrowing announcement and Fed decision Wednesday is the Labor Department’s October jobs report due Friday.

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October 29, 2023