The markets demonstrated resilience in November as the major indices tacked on gains for a second straight month. Powering these gains was an improvement in a handful of the most market-sensitive economic drivers, including a better-than-expected interest rate outlook from the Federal Reserve (Fed), moderating inflation numbers, improving gas prices, and a positive jobs report. Despite these bright spots, inflation remains stubbornly high and higher interest rates continue to weigh on longer-term expectations. Uncertainty points to continued market volatility indicating caution for investors and traders alike.
Stocks Up for Two Straight Months Stocks continued their comeback in November with solid gains across all the major indices. In November, the S&P 500® – a good proxy for the broader U.S. stock market – was up 5.4%. And that’s on top of the 8% gain in October. Meanwhile, the Dow Jones Industrial Average® was up 5.7%, adding to the 13.9% upswing last month. And the tech-heavy Nasdaq Composite also got a boost, booking a 4.4% gain in November on top of the 3.9% jump in October. Source: CNBC
Interest Rates Up, Forecast Moderating The Federal Reserve (Fed) raised the fed-funds interest rate by 0.75 percentage points (or 75 basis points) during its meeting in November. It also said that it was raising its current fed-funds rate target to the 3.75% to 4% range. The rate increase marked the fourth consecutive hike of 75 basis points and continues a dramatic pace of increases not seen since the 1980s. The fed-funds rate – which is the amount of interest charged by banks to loan money to each other – is the basis for most interest rates, including home loans, business loans, and interest on credit cards. The Fed raises rates so people and businesses will borrow and spend less, which can fight inflation. So, with inflation still at high levels, it’s no surprise that the Fed continues to raise rates. But a deep dive into the minutes of the latest Fed meeting provided a much-needed forecast for where future interest rates might be headed. The Fed said: In addition, a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate. A slower pace in these Stocks rallied for the second straight month in November. circumstances would better allow the Committee to assess progress toward its goals of maximum employment and price stability. Source: Federal ReserveBoard The markets interpreted this snippet from the Fed to mean that they’re going to continue raising rates, but not at the break-neck pace of 75 basis points like they have in the past. Since higher rates can reduce economic growth along with inflation, continuing to raise rates – but at a slower rate – might be the secret sauce investors have been hoping for: getting inflation under control without causing a recession.
Inflation Off Its Highs Speaking of inflation, the Consumer Price Index (CPI) report for October arrived early in November. Prices were up 7.7% from a year ago. And the rise in prices was 0.4% just for October. The so-called core inflation rate – which excludes the more volatile components of food and energy – was also up 6.3% from a year ago. With prices rising at this pace, the Fed has little choice but to continue to raise rates. But the latest CPI numbers contain a handful of positive nuggets. While the 7.7% hike in all prices in October was big, it’s down from 8.2% in September and 8.3% in August. In fact, October’s year-over-year increase was the lowest since the 7.5% rise in January 2022. And the core rate also showed improvement in October, down from the 6.6% rate in September. Source: Wall Street Journal
Gas Prices Ease During Thanksgiving Considering that core inflation is showing signs of moderating, it’s no surprise AAA reported that leading up to the Thanksgiving holiday, the national average for regular unleaded gas was $3.66 per gallon, down 11 cents from the prior week. From its June peak of nearly $5.02 per gallon on average, those numbers are down a considerable 27%. Source: AAA Newsroom
Jobs Still Strong but Slowing During October, employers added 261,000 jobs to non-farm payrolls. While that’s still a solid increase, it’s down from the 677,000 jobs added a year ago. And on a three-month average basis, employers added 289,000 to their non-farm payrolls. That’s also off the blistering three-month average of 539,000 jobs added per month a year ago. Meanwhile, in October the unemployment rate rose slightly to 3.7% from 3.5% in September. Source: Wall Street Journal Job increases are generally viewed as favorable. But when the economy is adding jobs at the pace it’s been doing, it indicates a tight labor market with a limited supply of workers. And just like any market that has a limited supply, to be able to employ that next worker, the price must go up. While that’s positive for workers, it also adds to a rising tide of prices and inflation.
The fact that job growth is slowing can provide support for the Fed’s slower pace of interest rate increases. And that slower pace will likely be viewed as positive for investors.
Best Regards, Arthur Strauss, CFP® President & CEO