Market stabilization through year’s end: A Goldilocks approach

11/27/2023 — The S&P 500® Index looks to extend the winning streak to five weeks, as encouraging inflation data, views that the Fed is done raising rates, and hopes for a soft-landing support markets. November is on pace to finish with a 9% gain for the S&P 500, the first winning month since July, and could be the best month since 2020. Volatility has calmed, with multi-month lows in both the equity and bond markets as investors have adopted a less emotional stance. The dollar continues to ease as global confidence grows, with the dollar index at the lowest level since August, down 4% from the October peak.

Technical factors continue to be a tailwind for markets, as investor sentiment and positioning continue to shift following a difficult three-month period. Global stocks saw $40 billion of inflows in the last two weeks, the strongest pace in nearly two years, while investment-grade bonds saw their strongest inflows in nearly four months. Stress indicators have calmed, with credit spreads hovering near an 18-month low, the VIX at the lowest level since before then pandemic, and the CNN Fear & Greed Index more than double the level from the beginning of November.

The end of last week solidified the market’s winning streak to a four-week run, which is notable considering how weak the days leading into November were. As of late, volatility has collapsed, both the bond and equity markets have stabilized, and the dollar has fallen significantly, which should be enough for investors to feel cautiously optimistic. At this point in the year, the direction of the current market – which is positive – is historically the direction the market finishes the year since there are few indicators that could drastically change its route. But, in order for this to be true, we’ll need to see a goldilocks approach from the Fed – not too weak and not too strong on policy. Come January, earnings and reported data from December will either prove or disprove the approach.

News

The state of the consumer is a major question for investors as we begin the holiday spending season. Mastercard’s SpendingPulse report showed US retail sales were up 3% from a year ago on Black Friday, with 8% growth in online shopping. The trends showed heavy discounting and price sensitivity among consumers, with increased reliance on "buy now, pay later" programs. This comes as the NY Fed’s household survey showed a record-high percentage of customers saying it is harder to obtain credit. Analysts note that this could be an elongated holiday season, as consumers began making purchases in mid-October to maximize discounts according to retail earnings releases. The National Retail Federation sees growth for the season at between 3% and 4% higher than a year ago, consistent with the average between 2010 and 2019. Between 2020 and 2022, the growth rates were 9%, 13%, and 5%, respectively.

Inflation expectations continue to moderate ahead of the PCE deflator report on Thursday. The 1-year breakeven inflation rate derived by the TIPS market is just above the Fed’s 2% target. The Fed Futures market has nearly no additional rate hikes embedded, with four cuts priced in through January 2025, beginning in May. Interest rates continue to moderate, with the 10-year Treasury yield hovering below 4.5% for the third week. Bloomberg’s Recession Probability Forecast now prices a 50% chance of a recession over the next year, the lowest odds in more than a year.

The ceasefire in Gaza officially ends on Monday, with the US and EU pushing for an extension, with President Biden saying said the deal was “structured so that it can be extended to keep building on these results.” Capital markets have not been reactive to the conflict, with little reaction in the gold, oil, or bond market. Both Israel and Hamas have expressed interest in maintaining the truce as long as progress continues to be made.

What to watch

Inflation data will be in focus this week, with the PCE deflator (the Fed’s preferred inflation metric) being released on Thursday. Other notable releases include new home sales on Monday, consumer confidence on Tuesday, revised third-quarter GDP on Wednesday, personal income and spending on Thursday, and manufacturing data on Friday.