CWG Investment Committee: Rates Rule

A historic bond rally moved stocks upward for their best month of the year. The Dow and S&P 500 both returned 8.9% while the Nasdaq finished 10.7% higher. The rally was preceded by three months of declines which resulted in a market correction (-10%) from the July S&P 500 top of 4,608. The S&P 500 November 30th closing level was about 1% shy of that high mark.
 
The S&P 500 started the year at 3,763 so it's been a great year so far which has followed a very poor one in 2022, when the benchmark began at 4,818.
 
If you feel like this has been a wild roller coaster ride you are not alone, considering that the 10-year US Treasury note slid from a 2023 peak of 5% in October to 4.3% at the end of November. That is the largest net monthly decline since December 2008, according to Nasdaq.com. The 10-year note had a yield of 1.3% just two years ago.
 
These downward rate movements caused the U.S. aggregate bond index to shoot up 5% in November, good for its largest monthly gain in 35 years, according to Bloomberg data.
 
The main catalyst for the November buying spree on Wall Street was better-than-expected inflation data and a softening labor market. Both these economic factors solidified investors' expectations that the Fed’s rate hike cycle has ended, which sent rates down, bond prices up, and stocks higher.
 
Headline CPI data in October was 3.2%. We have come a long way since inflation peaked at 9.2%. Inflation is expected to continue to fall in 2024. Investors are anticipating the Fed will cut rates in the first half of 2024.
 
“Inflation is created by government and by no one else,” economist Milton Friedman famously stated almost fifty years ago. It especially rings true today. Washington has created a budget deficit of $33 trillion which will require about $800 billion in annual interest payments, or roughly the same amount as our defense budget.
 
The fiscal debacle brewing in Washington is staggering, but it only matters to investors if the bond market cares. For now, the bond market is ignoring it.
 
While politicians and unelected Fed officials print money, U.S. corporations cut costs and innovate. Q3 earnings season has concluded with 82% of S&P 500 companies exceeding earnings expectations, according to FactSet. Q3 GDP was revised higher to 5.2%.
 
A hot war broke out between Israel and Hamas, yet WTI oil prices have gone down from $92 to $75 since October 7th. The bull market has shrugged off the conflict, however an escalation could eventually drag on the market.
 
In sum, we had a great month for bond and stock prices helped by lower interest rates, lower oil prices, and lower inflation numbers.
 
Some economists continue to expect a mild recession in 2024, while most are predicting a slower rate of growth but no recession. Consumer spending is softening in Q4 compared to the breakneck pace of Q3. The Atlanta Fed lowered its Q4 GDP growth estimate to a 1.8% rate, down from its original 2.1%.
 
The spread between the 2-year and 10-year Treasury yields continues to be negative 30 basis points, indicating recession warning. This indicator is historically accurate, but difficult for predicting the timing of any slowdown. Earnings are expected to rise by 12% next year, which may prove to be a reach if we experience a downturn. But for now, earnings and falling rates are propelling stocks higher.
 
We shall provide more comments and a detailed review of 2023, plus an analysis on what's in store for 2024 in our year end missive.
 
We now wish you all Happy Holidays and a Peaceful Christmas!