Stocks Gain and Close Best Month in a Year; Bonds Continue Rally

The Dow (+2.6%), NASDAQ (+0.4%), and S&P 500 (+0.8%) each rose last week, as they closed out November with the best month of gains in over a year.  Taxable bonds gained 0.8% and tax-free municipal bonds continued their strong rally by gaining 1.6%.  The 10-year Treasury yield fell 0.25% to finish the week at 4.22%.

Last week, the Fed-favored inflation gauge reported that inflation seems to be in more control at 3.5%, despite being elevated from the Fed’s target of 2%.  The continued trend of market rallies and strength are being driven by investors’ expectations of the Fed stopping its rate hiking campaign, even though the Fed has clearly stated not to make that assumption.  Regardless, stock and bond prices rose in anticipation of not only the Fed not raising interest rates, but that the Fed would begin cutting rates as early as March next year.  What message does that send?  The Fed likely won’t cut rates unless we have a fairly major economic downturn, and that’s obviously not good for stocks.  In short, there seems to be a disconnect with that, as stocks are rising for what appears to be the wrong reason.  Additionally, PE (price to earnings) ratios are about 20% above historic (20-year) averages right now, which means the markets are over priced by 20% or their earnings should increase by 20% without any stock price increase.  Thus, stocks are considered overvalued right now, but we all do love our account balances rising nicely.  Understandably, bond yields fell which results in bond values rising sharply.  Now that makes more sense.

This week, the November jobs data will be reported on Friday.  That report will provide the Fed with an idea of how the rate increases are affecting the economy.  A strong jobs report for November would almost certainly be met with a sharp drop in the stock market on Friday, because that implies the economy remains strong and serves as fuel for continued inflation.  The Fed meets next week, and it is widely expected that they won’t raise or cut interest rates.  Anything different will be a big surprise, which will be met with a major stock move in one direction or the other.

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^{The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.}