2023-11-19 14:03:28
Are US stocks poised to continue their meteoric rise or is a pause on the horizon? That’s the question investors are asking as the S&P 500 prepares to close out the year with new highs in sight.
Signs of slowing inflation have fueled hopes that the Federal Reserve has finished raising interest rates, helping to extend a rally that has seen the S&P 500 gain more than 9% since the end of the month of October. The index is now up almost 18% for the year and less than 2% from its highest level of the year, reached in July. Its record closing level, dating from January 2022, is around 6%.
The possibility of reaching these levels in the coming weeks depends in part on whether investors are convinced that the US economy is on track for a “soft landing”, that is, the Fed reduces l inflation without seriously harming growth. The economy has so far been resilient in the face of tighter monetary policy, although some measures of employment and consumer demand have weakened.
Another obstacle is the rising valuations and continued high yields of Treasuries. However, other factors, including historical seasonal trends, could support further gains.
We are currently seeing a balance between a lower inflation outlook and a better interest rate trajectory… juxtaposed with a slowing economy,” said Yung-Yu Ma, chief investment officer at BMO Wealth Management.
Investor optimism about stocks has increased in recent weeks as markets rebounded from a months-long slump that stretched from August to the end of October. Stock exposure of active investment managers rose to its highest level since August, after hitting a one-year low last month, according to the National Association’s Exposure Index active investment managers (National Association of Active Investment Managers).
U.S. equity funds attracted about $9.33 billion in net inflows during the week of Nov. 15, representing the largest weekly net buying since Sept. 13, according to LSEG data.
Treasury bond yields, whose steady rise in recent months has weighed on stocks, fell quickly: The benchmark 10-year Treasury bond yield stood at 4.43% as of early Friday, while last month it reached its highest level in 16 years, namely just over 5%. Yields move inversely to bond prices.
Analysts at Ned Davis Research, who recommend overweighting stocks, said this week that investors should continue to favor stocks over bonds. A key factor: weaker-than-expected consumer price data for October, released earlier this week, makes it unlikely the Fed will have to raise rates again.
Investors are wondering whether the Fed can pull off a soft landing, wrote Ed Clissold, chief U.S. strategist at Ned Davis Research. The CPI report…confirms that the tightening cycle is over and the “higher for longer” mantra may not last as long as previously feared.
Robert Pavlik, senior portfolio manager at Dakota Wealth, said a number of investor concerns have dissipated, including concerns related to the third-quarter earnings season turning out better than expected.
“Portfolio managers, whether individual or institutional, are going to realize that stocks are the best investment by the end of the year,” said Mr. Pavlik, who is “fully invested” in his stock portfolios.
Seasonality also works in favor of stocks: According to the Stock Trader’s Almanac, November and December recorded the second and third best monthly performances of the year since 1950, with average increases of 1.5% and 1.5%. 4%.
Next week, stocks will face a number of tests. Electronic chip heavyweight Nvidia releases its quarterly results on Tuesday. This is the final report of the earnings season for the “Magnificent Seven,” large-cap companies whose massive gains have driven stock indexes higher this year.
The health of the consumer-driven economy will be highlighted during “Black Friday”, the day after Thanksgiving which traditionally marks the start of holiday shopping in the United States. Data released Wednesday showed U.S. retail sales fell in October for the first time in seven months.
One source of concern is the resumption of rising stock valuations. The S&P 500 is trading at 18.7 times forward 12-month earnings estimates, about a two-month high and well above its long-term average of 15.6, according to LSEG Datastream.
Jason Pride, head of investment strategy and research at Glenmede, said his firm was underweight equities and was allocating a larger share than usual to cash and short-term fixed income.
“Rates are still high enough, financial conditions are still tight enough that the near-term horizon…is concerning and probably doesn’t justify the high level of valuations,” he said.
The recent surge in stocks means “the bar for positive surprises is also higher,” according to Keith Lerner, co-chief investment officer at Truist Advisory Services, who recommends increasing stock positions in a downturn.
It would be completely normal for stocks to take a pause,” he said.
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