by Alex Harding
Vice President
Equity Research and Portfolio Management
The Santa Claus Rally arrived early this year as investors’ wish for a pivot in Federal Reserve policy appears to be all but granted. After peaking at 9.1% in June of 2022, inflation, as measured by the Consumer Price Index (CPI), now stands at 3.1% with increases in the price of gasoline, apparel and food materially lower.
The day after last week’s November inflation report was released, the Fed held their target interest rate steady for a third meeting in a row. They delivered an early “present” to the capital markets by forecasting a sharper pace of interest rate cuts in 2024 than previously indicated. Market participants cheered the news, sending stock and bond prices higher – a dynamic we have been watching unfold since the yield on the 10-year U.S. Treasury bond peaked at 5% in late October.
With only four trading days left in 2023, the S&P 500 index has returned over 25% this year and within 2% of its all-time high set back in January of 2022. For most of the year, the S&P 500’s return could be explained entirely by the performance of the “Magnificent 7” stocks – Amazon, Alphabet (Google), Apple, Meta Platforms (Facebook), Microsoft, NVIDIA and Tesla. These mega cap stocks are AI-innovators and directly benefit from their leading positions within the industry. As shown in the chart below, the “Magnificent 7” are up 77% while the equal-weighted S&P 500 index (or average stock) is up 13%. But, if we go back to late October, the story looks quite different. At that point, the average stock was negative on the year as the Fed remained firm with their inflation-fighting stance. Since then, investors have been “gifted” a continued cooling of the labor market and favorable inflation reports leading to a re-pricing of all risk assets and expectations of multiple rate cuts in 2024. Not surprisingly, the biggest beneficiaries have been the most interest-rate sensitive industries – homebuilders, real estate investment trusts (REITs) and regional banks.
Takeaways for the Week
The market is pricing in six cuts to the Federal Funds target rate in 2024 – a key driver of the recent rally in stocks and bonds
While more stocks have been participating of late, the “Magnificent 7” stocks have had the greatest impact on the better-than-expected return for the S&P 500 this year
While there are only four more days left of trading in 2023, it’s never too late to start planning for 2024. Click here to read some useful tips for year-end planning by Samantha Pahlow, CTFA, AWMA