The dramatic ascent of stocks and the plunge of interest rates in recent days may not maintain an unbroken trajectory, but I also don’t believe the positive momentum will fizzle out in the coming weeks.

For a stock market rally with staying power to occur during the latter part of 2023, we’d need to see a blend of the following key ingredients.

• Bond yields must continue their descent.

During the October slump, the benchmark U.S. 10-year Treasury yield scaled the dangerous summit of 5%, only to fall in recent days to about 4.5%. The retreat caused a sigh of relief on Wall Street, lifting equities.

A return trip to 5% would be bearish for stocks, but with inflation cooling and the Federal Reserve nearing the end of its tightening cycle, we’re not likely to see that happen.

The falling yield signals that a recession isn’t in the cards. Case in point: The Mortgage Bankers Association (MBA) reported Wednesday that rates on the 30-year fixed mortgage dropped from 7.86% to 7.61% in the last week. That marks the biggest weekly drop in over a year. The MBA survey covers over 75% of all U.S. retail residential mortgage applications.

“The 30-year fixed mortgage rate dropped by 25 basis points to 7.61 percent, the largest single-week decline since July 2022,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Last week’s decrease in rates was driven by the U.S. Treasury’s issuance update, the Fed striking a dovish tone in the November FOMC (Federal Open Market Committee) statement, and data indicating a slower job market.”

The MBA also noted that mortgage applications increased 2.5% from one week earlier.

• The Federal Reserve must stay on the sidelines.

The Fed last month paused its rate hikes, for a second time this year. The central bank has strongly hinted that it would again stand pat at its December meeting. As the lagging effects of monetary tightening become manifest in the economy, it’s also likely that the Fed will start cutting rates sometime in 2024.

A cut in rates would boost stocks, but in the meantime, Fed pauses also tend to be positive periods for stocks.

• The labor market must continue its balancing act.

The October employment report revealed the addition of a modest 150,000 jobs during the past month, for an uptick in the unemployment rate to 3.9% (see chart).

October’s job harvest was a mere half of September’s, significantly down from the six-month average of 216,000.

Jobs growth is healthy, but not accelerating at an inflationary pace. The hiring engine continues to hum along, but with a hint of softness in the labor market.

The choreography of steady job growth and the moderation in wage gains is what the Fed wants to see, as it tries to curb inflation without wrecking the economy.

The surge in the labor-force participation rate also is encouraging. It reflects a burgeoning supply of labor, offering support for continued jobs growth and low unemployment, while simultaneously providing respite from wage pressure and the specter of inflation.

The October report revealed that average hourly earnings edged up by a modest 0.2% from the prior month and a mere 4.1% on an annual basis. The job quit rate is waning, a further signal that wage growth and associated inflation fears should continue their simultaneous descent. The rising tide of labor supply accomplishes two goals: emboldens consumer spending (right before the crucial holiday shopping season) and quells the flames of inflation.

The main U.S. stock market indices took a breather Wednesday and closed mixed, as follows:

• DJIA: -0.12%
• S&P 500: +0.10%
• NASDAQ: +0.08%
• Russell 2000: -1.10%

Bond yields dipped, as did the CBOE Volatility Index (VIX). Stocks wavered, but keep in mind, they’ve enjoyed a powerful winning streak.

On Wednesday, the S&P 500 racked up its eighth consecutive session in positive territory; for the tech-heavy NASDAQ, it was its ninth. On Tuesday, the Dow Jones Industrial Average booked a seventh straight gain.

WATCH THIS VIDEO: Is The Tide Turning for Stocks?

As I’ve noted above, a major factor driving these recent stock market gains is the collective feeling on Wall Street that we’ve witnessed peak interest rates.

Which brings me to the utilities sector.

Among the publications that I edit is our premium trading service Utility Forecaster. My colleague Robert Rapier is the chief investment strategist.

As you position your portfolio for next year, turn to utilities stocks. The utilities sector has gotten clobbered lately by rising interest rates, but it’s poised to rebound when the Fed pivots in 2024. That means value plays are ready for the picking.

However, you need to pick the right ones. For our list of the highest-quality utilities stocks, click here now.

John Persinos is the editorial director of Investing Daily.

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