The stock market has rallied this month, but investors remain skittish. Although not widely expected, another rate hike by the Federal Reserve isn’t out of the question. A further tightening of the monetary spigot would demoralize investors.

However, inflation is cooling while at the same time the economy remains on solid footing. This combination undermines the notion expressed by some pessimists that we’re simply experiencing a bear market rally.

Notably, even segments of the market that faced challenges earlier in the year, such as small-cap stocks and investment-grade bonds, have rebounded with increases of over 8% and 3%, respectively.

Concurrently, Treasury bond yields have moderated, with the U.S. 10-year Treasury yield falling to approximately 4.30%, substantially below recent highs of 5%. This decline in yields has acted as a catalyst, fostering improved performance in both stocks and bonds.

The forthcoming release of personal consumption expenditure (PCE) inflation data will be a pivotal factor. A consistent trend of decreasing inflation has played a crucial role in the rally. The October PCE and core PCE inflation readings, considered the Federal Reserve’s preferred inflation measures, are both expected to decline.

Projections suggest that headline PCE inflation will decrease to 3.1% year-over-year, down from 3.4%, while core PCE inflation (excluding food and energy) is expected to fall to 3.5%, a decrease from the previous month’s 3.7%.

These downward surprises in inflation have contributed to the reduction in Treasury bond yields, providing the market with a compelling reason to move higher. The expectation is that both headline and core inflation will continue to moderate in the coming months, albeit not necessarily in a linear fashion.

Analysts anticipate gradual reductions in the shelter and rent components of core inflation, coupled with moderation in wage gains and services inflation. Meanwhile, economic growth has remained on track.

As the market navigates these economic shifts, attention is turning toward the Fed and its upcoming December meeting. Investors are closely monitoring speeches by Fed members in the lead-up to the meeting and interest-rate decision scheduled for December 13.

In the most recent November Federal Open Market Committee (FOMC) meeting, Fed Chair Jerome Powell struck a more moderate tone, emphasizing a balanced approach between the risks of overtightening and the risks associated with insufficient rate hikes.

Following the lower inflation readings for October, the market’s probability of a rate hike at the December meeting has diminished to around 5%. This has led to a prevailing sentiment that the Fed might currently be on pause, with the potential for normalization in both inflation and interest rates over time.

The consensus view suggests that the Fed is likely to remain on hold until there is a more credible move toward 2.0% core inflation. At that point, it could signal a gradual reduction in interest rates to achieve a less restrictive policy stance.

Through it all, the steep decline of the 10-year Treasury yield remains a major impetus for the rally (see chart).

Stocks tend to fall as yields rise, and vice versa. If investors expect higher rates in the future, it reduces the present value of future earnings for stocks, especially for “growthier” fare. However, the odds are increasing for a pivot to lower rates by the Fed in the months ahead.

WATCH THIS VIDEO: How to Beat The Investment Crowd in 2024

Carping about the Fed is a trendy habit among the financial cognoscenti, but the fact is, the central bank seems to have gotten things right.

The main U.S. stock market indices closed mixed on Wednesday as follows:

• DJIA: +0.1%
• S&P 500: -0.1%
• NASDAQ: -0.2%
• Russell 2000: +0.6

The rate tightening cycle is approaching the end. 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 eases up. That means value plays are ready for the picking, as the laggards of 2023 become the leaders of 2024.

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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