November 2023 Market Perspective
U.S. stocks and bonds got a lift recently, with a surprisingly good October inflation report and falling Treasury yields. The Bureau of Labor Statistics announced earlier this week that the “headline” consumer price index (CPI) climbed 3.2% on a year-over-year basis in October, a slower pace than the 3.7% in August and September. Economists surveyed by FactSet expected October inflation to slow to an annual rate of 3.3%. On a month-over-month basis, the CPI was flat. Economists expected October inflation to slow to 0.1% from a monthly rate of 0.4% in September.
Core inflation, which excludes volatile food and energy prices, also came in better-than-expected and showed continued cooling. October’s core CPI rose 4% on a year-over-year basis, a slight reduction from the 4.1% reported in September and the smallest 12-month level since September 2021. On a month-over-month basis, core CPI rose 0.2%, and substantial decline a from the o.6% rate in September.
Falling Treasury yields have also played a key role in the market performance in the last two weeks. The yield on the 10-year Treasury, considered a barometer of interest rates, has recently fallen from 5% to settle in at or about 4.5%. This decline in yields was welcomed by the stock and bond markets, but especially for technology stocks.
The question remains if the recent 3-month decline in headline CPI is enough to convince the Federal Reserve (Fed) not to raise interest rates at their upcoming December 13 meeting. According to CME FedWatch, there is a near 100% probability that the Fed will leave interest rates (the federal funds rate) unchanged at the 5.25% – 5.5% range, up from the 69.6% probability of no change in rates just a month ago.
The recent uptick in the investment markets reversed losses in each of the last three months in the Dow, S&P 500 and NASDAQ. September, historically the worst month for the stock market, posted the biggest losses of the year. For the months of September and October, the Dow lost 3.9% and 1.2%, respectively, and the S&P 500 dropped 5.4% and 2.1%, respectively. The NASDAQ, hit the hardest, declined 6.4% and 2.8%, respectively.
Despite the last three challenging months for the investment markets, the economic updates released in October showed signs of continued growth. The first reading of 3rd quarter gross domestic product (GDP) showed a very strong 4.9% growth rate for the economy, up from 2.1% in the 2nd quarter. This strong growth was supported by an increase in personal consumption growth during the quarter, as well as by a resilient labor market. September’s employment report showed a surge in hiring, with 336,000 jobs added during the month when analysts expected a mere 179,000 jobs.
Looking ahead, the overall outlook remains positive. The return to earnings growth in the 3rd quarter is a welcome sign that businesses are continuing to benefit from a solid economic landscape. Additionally, while there are signs of potential slower growth ahead, it’s important to note that slower growth is still growth and that, overall, the economy remains healthy. That said, although the markets tend to rally into year-end, short-term risks that could lead to market volatility remain.
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