The U.S. stocks market has seen a remarkable surge in November 2023, with the S&P 500 boasting a 9% monthly gain, the highest since July 2022. Despite concerns about slowing growth and potential inflation in 2024, the appetite for stocks on Wall Street remains strong.
Factors Influencing Stock Movement
Investors are closely watching the dynamics of an economic soft landing, hoping it will prompt the Federal Reserve to reconsider its stance on interest rates. This optimism is in stark contrast to worries that lingered throughout 2023, such as the climbing dollar and elevated U.S. Treasury yields, which are now showing signs of reversal.
Market Trends and Reversals
The trends U.S. stocks that once troubled investors are now shifting, creating a more positive outlook. The fear gauge, a key indicator for market sentiment, is standing near post-pandemic lows, adding to the optimism.
Assumptions Driving Market Moves
Two key assumptions are driving these market moves. Firstly, there is a growing expectation among investors that the Fed will initiate monetary policy easing in the first half of 2024. This dispels concerns about the central bank maintaining higher interest rates for an extended period. Rates futures markets are already pricing in cuts as early as May 2024, according to LSEG data.
Goldilocks Scenario
Simultaneously, U.S. stocks resilient economic data is fostering hopes for a Goldilocks scenario. This scenario envisions the U.S. economy emerging relatively unscathed from the significant rate increases implemented by the Fed since March 2022.
Changing Narrative
Recent data releases, including reports of slower job growth and cooling consumer prices, have changed the narrative, boosting investor confidence. Jack Ablin, Chief Investment Officer at Cresset Capital, notes the increased confidence in reaching peaks in the fed funds rate, inflation, and the 10-year Treasury yield.
Fed Governor’s Hint on Rate Cuts
Tuesday saw a notable boost in the prospects for rate cuts after Fed Governor Christopher Waller, often considered a hawk, hinted at lower interest rates in the coming months if inflation continued to ease.
GDP Growth in Q3
Wednesday’s release of third-quarter GDP numbers revealed faster-than-expected growth in the U.S. economy during the period. However, there are indications that momentum is slowing due to higher borrowing costs impacting hiring and spending.
Impact on Treasury Yields and the Dollar
These developments have accelerated declines in Treasury yields and the dollar. The 10-year Treasury yield, a key metric inversely related to bond prices, is down about 70 basis points from its recent highs. Simultaneously, the dollar has depreciated about 4% against major currencies since early October.
Market Performance
Despite the concerns, the S&P 500 has shown remarkable resilience, posting a year-to-date gain of about 19% and nearing a fresh record high. The Cboe Volatility Index, known as Wall Street’s fear gauge, is at its lowest level since early 2020, before the COVID-19 pandemic.
Investor Strategies
Investors are actively considering adjustments to their portfolios in response to falling rates. Jake Schurmeier, a portfolio manager with Harbor Capital, mentions “active discussions” regarding increased allocations to small-cap and emerging market stocks, anticipating benefits from falling rates.
Dissenting Views
However, not everyone shares the conviction that the Fed is done raising rates. Richmond Fed President Thomas Barkin emphasized on Wednesday that he is not ruling out another rate hike if inflation flares again. This dissenting view adds an element of uncertainty to the prevailing optimism.
Economic Projections and Recessions
Economists at Deutsche Bank have projected 175 basis points in Fed rate cuts in 2024 but warned that this could come with a mild recession in the first half of the next year. Despite this, their forecast for the S&P 500 suggests a significant increase by the end of 2024.
JPMorgan’s Outlook
On a more pessimistic note, analysts at JPMorgan express concerns about the macro backdrop for stocks in the absence of rapid Fed easing. They highlight rich valuations, low volatility, and persistent geopolitical and political risks. JPMorgan’s 2024 price target for the S&P 500 is notably conservative, suggesting potential challenges ahead.
Risk Assessment
Michael Green, Chief Strategist at Simplify Asset Management, adopts a cautious stance. He refrains from adding more risk to portfolios, believing that market participants have not fully considered the risks associated with the 2024 outlook. His concern lies in the likelihood that the Fed might be slow to react to falling inflation unless accompanied by a meaningful deterioration of the economy.
Conclusion
In conclusion, the U.S. stocks market is navigating a complex landscape of hopes for rate cuts, changing economic narratives, and dissenting views on the Fed’s future actions. While optimism prevails, caution is warranted as uncertainties linger. Investors should closely monitor evolving economic indicators and be prepared for potential shifts in market dynamics.
FAQs
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Are rate cuts certain in 2024?
- The likelihood of rate cuts in 2024 has increased, but certainty depends on various economic factors.
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How are investors adjusting their portfolios?
- Investors are actively considering increased allocations to small-cap and emerging market stocks in anticipation of falling rates.
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What impact could dissenting views from the Fed have?
- Dissenting views, such as Thomas Barkin’s, add an element of uncertainty and could influence market sentiment.
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What challenges does JPMorgan foresee for stocks in 2024?
- JPMorgan highlights concerns about a challenging macro backdrop, rich valuations, low volatility, and geopolitical risks.
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Why is Michael Green cautious about adding more risk to portfolios?
- Michael Green believes that market participants may not have fully incorporated the risks associated with the 2024 outlook, emphasizing the potential for a slow Fed response to falling inflation.