In November, both the stock and bond markets experienced a robust upswing, setting a positive tone for the upcoming year. After a decline in the preceding three months, stocks rebounded, with the Nasdaq leading the charge, followed by the S&P 500, Russell 2000, and Dow. (1) This marked the best month for indexes since late 2022 and the most robust November performance in three years. Investor optimism rose as signs of slowing inflation suggested the Federal Reserve might halt its interest rate hikes.
Recent inflation data for October showed a deceleration in price growth. The Consumer Price Index (CPI) remained steady compared to a 0.4% increase in September. Over the 12 months ending in October, the CPI rose by 3.2%, down from 3.7% for the 12 months ending in September. Core prices, excluding food and energy, increased by 0.2% in October and 4.1% over the last 12 months. The Personal Consumption Expenditures Price Index (PCE) also indicated minimal growth in October, rising less than 0.1%. (2) Although these trends in inflation are decreasing and stoking positive market sentiment, they remain above the Fed’s 2% target. Consumers must be noticing the easing inflation in their wallets as inflation expectations plunged in the latest University of Michigan consumer sentiment survey released December 8th. This should reinforce the Fed continuing to pause rate hikes and further embolden investors.
The role of the Federal Reserve in shaping economic and market conditions has been a central theme since the massive stimulus to offset the pandemic’s economic ill effects. One of the side effects of post-pandemic Fed rate hikes to curb inflation has been an inverted yield curve where short-term rates are higher than longer-term rates. These conditions make it especially difficult for financial institutions that derive revenue from borrowing short and lending long. However, the higher short-term rates have been a boon for more conservative and income-oriented investors. The yields returned to levels on CDs, money markets, and bonds, not seen since before the financial crisis of 2008 & 2009.
To illustrate, the graph below maps the yield on the 10-year US treasury over the past 20 years as of December 7, 2023. You can see the low on the 10-year US treasury reached .65% in March 2020, during the most uncertain days of the pandemic. In mid-October of 2023 the 10-year US treasury closed just below 5% at 4.998%. With the recent favorable reports of inflation trending downward, the Fed is not expected to raise rates further and pivot to rate cuts in 2024. The UST 10-year yield retreated rapidly in November from nearly 5% to just over 4%, surging bond prices in November (bond prices and yields have an inverse relationship), with the 10-year Treasury bond having its best month since 2011, signaling investor confidence that the Fed may cease raising interest rates.
Receding inflation and the prospect of peak interest rates in the rearview mirror are very positive developments. However, the continuance of an inverted yield curve maintaining the headwind for banks described above and its long-accepted significance as a signal that portends recession ahead may make for continued volatility ahead. Should the GDP growth falter and unemployment rise more than expected, a growth scare may result, bringing the durability of corporate earnings into question. These developments would prod the Fed to pivot and cut short-term rates. These cuts, in turn, can normalize the yield curve and, with short-term rates lower than long-term rates, will go a long way to getting the banking sector back on track and improving credit conditions.
We advocate focusing on what we can control. Specifically, we will remain committed to investment strategies that are first informed by our client’s financial plans and unique investment profiles, as well as portfolios that are well-diversified, cost-effective, and tax-conscious. As the year winds to a close, now is the time to look toward year-end tax planning. We are here to assist you, and the checklist below is provided to prompt you about specific topics you may want to address before the end of the year.
Year-end Tax Planning Checklist:
• Make Contributions to Retirement Accounts
• Make Charitable Contributions
• Does it Make Sense to “Stack” Deductible Items in Alternating Tax Years?
• Make Annual Gifts to Family Members
• Check Paycheck Tax Withholding Rates
• Evaluate Capital Gains and Losses; Realized and Unrealized
• Review your Estate Plan
Your November portfolio reports have been deposited in your eMoney vault. If you are interested in discussing them or the year-end tax planning opportunities that best align with your goals and objectives, we are conducting reviews and would love to discuss those with you. You can call us or schedule a review here.
- NASDAQ, S&P 500, Dow – are unmanaged groups of securities considered to be representative of the stock market in general.
This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward-looking and should not be viewed as an indication of future results.