Stocks jumped again today following a massively bullish month as market participants processed Fed Chair Jerome Powell’s latest remarks on rates.
The S&P 500 saw a rise of about 0.5%, while the Dow Jones Industrial Average climbed approximately 0.7%, adding over 200 points. The Nasdaq Composite also gained, advancing by 0.4%.
November witnessed a significant rally in stocks, marking their strongest monthly performance since 2022. This surge was driven by a growing belief that the Federal Reserve had concluded its cycle of rate hikes, evolving into expectations of rate reductions before mid-year.
eToro US investment analyst Callie Cox commented on the recent market dynamics, stating, “It’s one of the best months we’ve seen in the last decade. And I think it shows us how a lot of investors were caught off guard by the Fed’s flexible stance after the Nov. 1 meeting.”
The spotlight now turns to Powell’s insights on policy, particularly following October’s data indicating a decline in inflation to its lowest levels since 2021. Investors are keenly awaiting clarity on the Fed’s stance, especially after a series of mixed messages from various Fed officials.
While Powell acknowledged that monetary policy has entered a restrictive phase, he did not rule out the possibility of further rate increases, stating, “We are prepared to tighten policy further if it becomes appropriate to do so.”
This statement comes in the wake of the latest figures from the core Personal Consumption Expenditures index, the Fed’s preferred inflation measure, which showed a gradual decrease in inflation.
Core PCE for October was reported at 3.5%, a decrease from September’s 3.7%, continuing a downward trajectory from June’s 4.3%.
Investors, who had been increasingly betting on the end of the Fed’s rate hikes, are now contemplating potential rate cuts in the first half of 2024. Billionaire investor Bill Ackman even anticipates the Fed might start reducing rates as early as the first quarter.
At its last meeting, the Federal Open Market Committee maintained interest rates at a range of 5.25%-5.50%, the highest in 22 years. The Committee is scheduled to convene again on Dec. 12-13.
In his speech, Powell highlighted that core inflation had averaged an annual rate of 2.5 percent over the six months ending in October, emphasizing the need for continued progress towards the Fed’s 2 percent objective.
Powell, along with his colleagues, anticipates a slowdown in growth and consumer spending over the next year as pandemic effects wane and higher rates begin to impact growth. He noted that the full impact of the Fed’s aggressive rate hikes might not yet be fully realized.
The Fed Chair reiterated the unusual uncertainty surrounding the economic outlook, emphasizing the Fed’s cautious and meeting-by-meeting approach. This suggests that the Fed might maintain steady interest rates in December, while not yet declaring victory in the battle against inflation.
Other Fed officials echoed similar sentiments this week. New York Fed President John Williams remarked that inflation is “too high” and the Fed’s task is far from complete. San Francisco Fed President Mary Daly, in a recent interview, stated that it’s too early to discuss the end of hikes or the onset of cuts, saying, “I’m not thinking about rate cuts at all right now.”
Meanwhile, oil prices stabilized after initially losing ground following OPEC+’s additional output curbs, which failed to impress investors. WTI crude futures were trading around $76 a barrel, while Brent futures hovered below $83.
With the bull case for oil fading fast, recession fears surrounding energy stocks could soon leak into the general market. Many leading tech stocks were down this morning, too, despite strong overall market performance through noon.
But the answer to the million-dollar question – can stocks really keep rallying? – is a resounding “no” that grows louder with each bullish session. Eventually, bulls will run out of steam, because you can’t have a “Santa rally” that starts in November. Keep in mind that the Fed hasn’t even admitted that it’s cutting rates yet, either, which is something else (probably coming sooner than expected) that should galvanize bulls heading into the new year.