Christmas Comes Early for Investors

Ask the average guy hunched over a beer in the local bar how the economy and financial markets are performing, and chances are, he’ll angrily tell you conditions are terrible. And he’d be wrong. Such is the power of negative media spin.

Did you know, for example, that gasoline prices have fallen for 10 straight weeks? Prices at the pump only get attention in the news when they’re rising, especially by partisan outlets that like to beat up on political incumbents.

After spending the past two years warning us that a recession is imminent, the mainstream media still can’t grapple with good economic news.

As the final month of 2023 gets underway, here are the facts: Inflation is substantially decreasing, the Federal Reserve is signaling moderation in policy tightening, the economy is defying high interest rates, and corporate earnings growth has been surpassing expectations.

In 2023, the S&P 500 has been staging an impressive recovery, boasting a robust nearly-20% gain this year after a lackluster 2022.

The recent surge in stock performance was highlighted by a stellar November. Last week’s additional gains contributed to the S&P 500’s first monthly increase since July, underpinned by favorable economic data (see table).

A November to remember…

November witnessed remarkable stock performance, with the S&P 500 gaining 8.9%, the best in almost a year and a half and the second-best in three decades.

This surge erased the downturn from August to October. The rally propelled the S&P 500 to a new high for 2023, emphasizing that downturns can create opportunities for disciplined investors. The consensus forecast of peak interest rates triggered the November rally, setting the stage for a rally in the run-up to Christmas and New Year’s.

The enthusiasm in November extended beyond stocks to investment-grade bonds, which registered their best monthly return in 30 years. This contrasts with the challenging month for bonds in September. The rally in bonds aligns with the expectation of a continued pullback in interest rates throughout the next year.

Leadership in the market is coming from cyclical sectors and those most responsive to declining interest rates. Small-cap stocks outperformed in November, reflecting a positive economic outlook, while financial services, consumer discretionary, technology, and real estate sectors all posted gains exceeding 10% in the last month.

With equities reaching a year-to-date high, the S&P 500 is now within 5% of its all-time peak in January 2022. The rally has made chumps out of the bears.

Interest rates have significantly decreased since their October peak, but unlike stocks, they have not executed a full round trip. While equities are poised to surpass their previous peak, interest rates are expected to trend lower without reaching the levels seen during the last stock market high.

Reflecting on historically strong months, the market typically continued to rise in the following month and three months, showcasing average gains of 2.7% and 5.3%, respectively. The march towards previous highs will be shaped by inflation’s trajectory.

Inflation remains on a downward trend, supported by the latest consumer price index reading in November. While occasional hiccups may occur, the expectation is for continued lower inflation, providing a foundation for sustained market strength.

The Federal Reserve’s November meeting, influenced by encouraging inflation data, played a significant role in the market’s recent gains. The decision to hold rates steady and the indication of a willingness to forgo additional tightening boosted market confidence. While rate hikes are likely off the table, the Fed may continue to address inflation concerns, preventing excessive exuberance in the markets.

Despite expectations of an economic slowdown, the labor market’s solid foundation is anticipated to mitigate any severe impacts on consumers, preventing a sharp recession. Early signs of softening in the labor market are appearing, but with initial jobless claims remaining historically low. The economy is expected to regain momentum in the latter half of 2024 after navigating the lagged effects of tight Fed policy.

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

From a year-to-date perspective, technology and communication services stocks have surged by over 50%, followed closely by the consumer discretionary sector with a gain exceeding 33%. On the flip side, defensive sectors continue to lag, with utilities, health care, energy, and consumer staples all experiencing declines exceeding 4% for the year.

That said, the New York Stock Exchange Advance/Decline line (NYAD) has been rising, a clear sign of healthy market breadth. Investors are anticipating a prosperous Christmas.

PS: 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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