Stocks Extend Gains For Best Month in Over a Year; Bonds Mixed

In a holiday-shortened week, the Dow (+1.4%), NASDAQ (+1.0%), and S&P 500 (+1.1%) posted modest gains for the 4th consecutive week, as the indices have gained the most in one month (so far) in over a year.  Further, the gains last week were broad-based, as every sector of the S&P 500 showed increased.  Meanwhile, taxable bonds fell 0.1% while tax-free municipal bonds gained about 0.5%.  The 10-year Treasury yield gained 0.03% to end the week at 4.47%.

In economic news last week, my favorite report, Leading Economic Indicators (LEIs) reported a 0.8% drop over the prior month, marking the 16th consecutive month of declines.  As noted previously, LEIs have been a very accurate predictor of a forthcoming recession.  Durable goods orders fell by 5.4% over the prior month as well, indicating that the rate hikes from the prior year are making their way into the economy.  Last week was also the busiest shopping week of the year, and consumers seemingly didn’t disappoint, but the final numbers will be reported in January.

In the week ahead, the Fed-favored inflation number, Personal Consumption Expenditures (PCE) will be reported on Thursday.  This report will assist the Fed in its decisions of what to do about raising or lowering interest rates in the coming months.  However, there is good reason to believe that the Fed is done with its rate-hiking campaign.  In other inflation reports, it appears that the annualized inflation rate over the past six months has dipped well below 3%, closing in on the Fed’s target inflation rate of 2%.  High inflation is bad for the economy, and the Fed stopping its interest rate hikes is good for the stock and bond markets.  However, many economists believe that the stock market is currently above where it “should be”, based on the price to earnings (PE) ratios.

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