Year-End Outlook: The Investment Road Ahead
The October correction is in the rearview mirror. But as super-investor Warren Buffett once said: “In the business world, the rearview mirror is always clearer than the windshield.”
Perhaps country singer Mary Chapin Carpenter put it best: “Sometimes you’re the windshield, sometimes you’re the bug.”
Does the November rally have momentum, or will investors get squashed again? A look through the windshield reveals fundamental and technical factors that support a positive outlook for the rest of 2023 and into 2024.
For starters, inflation is substantially easing. In October, the annual rate of the consumer price index (CPI) dropped from 3.7% to 3.2%, aided by a sharp fall in gasoline prices. Core CPI, a more accurate gauge of the underlying trend because it excludes food and energy, fell from 4.1% to 4.0%, marking its lowest reading in two years.
Goods prices have consistently dropped, driven by declining used car and truck prices. Supply chains are improving, lowering transportation costs, and even shelter inflation is easing off, especially in the housing market.
We saw the same downward momentum with the producer price index (PPI) for October, an indication that wholesale prices are dropping as well.
Inflation is hitting the brakes faster than the Federal Reserve anticipated, while economic growth remains resilient. This balance will likely prompt policymakers to revise their inflation projections lower, departing from predictions made in September of 3.7% by the end of 2023 and 2.6% sometime in 2024. Inflation is getting ever-closer to the Fed’s target rate of 2%.
Economic growth is decelerating but remains on track, a “Goldilocks” scenario that the Fed likes to see. Despite robust U.S. gross domestic product (GDP) growth, signs of weaker household consumption and a decelerating labor market are emerging. However, this slowdown is gradual, aligning with the Fed’s “dual mandate” to combat inflation without tipping the economy into recession. Picture it as a smooth transition to a slower lane instead of a sudden swerve into a ditch.
October retail sales dipped, but not as much as anticipated, with control-group sales, crucial for GDP calculations, rising 0.2% month-over-month. With consumers employed and feeling flush, the holiday shopping season is starting off well.
Jobless claims, though on the rise, remain about 30% below historical averages. The solid starting point suggests companies may slow hiring but approach layoffs cautiously due to the continued demand for workers, as evidenced by the gap between job openings and the unemployed.
The November rally in both equity and bond markets reflects Wall Street’s increasing confidence that the Fed is concluding its rate-hiking spree, potentially paving the way for rate cuts in the second half of 2024. The main equity indices turned in another positive performance last week (see the following table):
This holiday-shortened week started with a bang. The main U.S. stock market indices closed sharply higher on Monday, as follows:
- DJIA: +0.58%
- S&P 500: +0.74%
- NASDAQ: +1.13%
- Russell 2000: +0.52%
Stocks were lifted higher by gains in Microsoft (NSDQ: MSFT) and Nvidia (NSDQ: NVDA), as the artificial intelligence (AI) mania resumed. MSFT hit an all-time high. The big news at Microsoft was the company’s announcement that erstwhile OpenAI chief Sam Altman will be joining the tech behemoth to run a new AI research team.
To be sure, tech stocks have been on a tear, but stock market leadership has expanded beyond the usual suspects. The rally has included shares across most sectors, not just a handful of mega-cap tech names. Small-cap and cyclical stocks are taking the stage, suggesting economic and stock market vibrancy as we head into 2024.
This improving market breadth has been reflected in the rising New York Stock Exchange Advance/Decline line (NYAD). A rising NYAD indicates there is broad-based strength in the market, because a larger number of stocks are participating in the upward movement. The trend signals a healthy market where a significant portion of stocks is experiencing positive momentum.
For the underdogs in the market, including bond proxies, small-caps, and value-style investments, there’s an opportunity to catch up as the headwind of rising yields subsides. A gradually cooling economy allows the Fed to cut rates next year, potentially weakening the U.S. dollar and boosting international returns.
The benchmark SPDR S&P 500 ETF Trust (SPY) has climbed well above its 50- and 200-day moving averages. When the price of the SPY rises above its moving averages, it indicates that recent average closing prices have surpassed historical averages. This implies strong upward momentum and sustained buying interest in the market (see chart, with data as of market close Monday):
It’s also bullish that the CBOE Volatility Index (VIX), aka “fear index,” plunged to about 13 on Monday, well below the bearish threshold of 20.
The ingredients for an extension of the current rally are in place. However, markets are never a straight line, and a pause to digest recent gains could be on the horizon, especially if we get a nasty surprise from forthcoming economic data.
The week ahead…
Keep an eye on the following economic reports, scheduled for release in the coming days:
U.S. leading economic indicators (Monday); existing home sales, minutes of the Fed’s Oct. 31-Nov. 1 Federal Open Market Committee (FOMC) meeting (Tuesday); initial jobless claims, durable goods orders, consumer sentiment (Wednesday); S&P flash PMIs for manufacturing and services (Friday).
Looking ahead to 2024, the lagging effects of high-interest rates might stir bouts of volatility, but I believe lower rates and rising earnings will fortify equities and rejuvenate battered bonds.
Editor’s Note: As I’ve just explained, a major factor driving stock market gains so far this month has been 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.