On Nov. 9, Federal Reserve Chair Jerome Powell issued a warning to traders and financial markets: Don’t assume rates will remain stable or fall for the foreseeable future.
The computers that power financial markets saw his comments as a threat to rising markets and sold off.
However, a day later, traders, investors and all their computers saw widespread optimism everywhere and the markets bounced back enthusiastically.
The reasonable conclusion would be that the rally that erupted in late October still had room to maneuver, perhaps well into December.
All major averages rose on November 10. Interest rates went down. So did oil and gasoline prices.
A better conclusion to what awaits us might be this one word: maybe.
Related: Mortgage rates see biggest drop in a year
The wild card in this bull scenario is the ongoing battle in Washington over federal spending and who really has the power.
Without some sort of resolution to appropriate the money and keep all government agencies open, large portions of their daily operations could come to a halt at midnight on November 17.
A government shutdown would disrupt all types of activities in the United States and even the world. There is a good chance that an untimely slap of volatility will break out starting Monday.
Concerns about the closure come after rating agency Moody’s’ Nov. 10 announcement that it had changed the outlook on the U.S. government’s credit rating from stable to negative.
The announcement is not a credit rating downgrade, but it could lead to one. The warning could drive up interest rates and validate Fed Chair Powell’s warning. Fitch Ratings downgraded US debt from AAA to AA+ in August.
Earnings reports coming from Home Depot, Walmart, Target
All of that will be the backdrop to a week that will see earnings reports from Home Depot.HDcisco systemsCSCOWalmartWMTAimTGTApplied materials ENORMOUSand Ross storesRost.
In addition, important economic reports are coming such as US Retail Sales and the Consumer’s price indexon November 1, Producer Price Indexon November 15 and report on housing starts and construction permits on November 17.
The week ending November 10 saw the Dow Jones Industrial Average djirises 0.7% in the week, with the Standard & Poor’s 500 index^ENrising 1.3%. The Nasdaq Composite Index^COMPXadd 2.4%. The tech-heavy Nasdaq-100 index^NDXjumped almost 2.9%.
The Dow Jones is up 3.7% for the month and 3.4% for 2023. The S&P 500 has gained 5.3% in seven trading days in November and is up 15% so far this year . And it produced its best two-week performance of the year.
The Nasdaq is up 7.4% monthly and almost 32% annually. The Nasdaq-100 has soared 42%.
Meanwhile, crude oil fell 4.2% on the week to $77.17, while the national retail price of gasoline fell $3.39 a gallon, down 1.4% on the week and down 12 .7% lower than the 2023 high price of $3,881 on September 18.
Yes, this snapshot offers an optimistic view of the economy, but risks remain, starting with the threat of closure.
Looking at all the risks
Then there is the ongoing debate over whether stock prices are too high. Barron’s Jacob Sonenstein argues that stock prices are still too high: the S&P 500 sells for 18 times earnings. And much of that multiple is the result of low interest rates through early 2022.
It’s also true that the gains of the S&P 500, Nasdaq and Nasdaq-100 over the past year are the result of huge gains in a limited number of stocks. Nvidia, Microsoft (which hit new 52-week highs last week), Apple and Google parent AlphabetGOOGLEand the main Facebook metaplatformsGOAL.
There was hope that last week’s big gains among smaller stocks and indexes were a healthy development. Unfortunately, this week the market was all about big stocks.
AND Factset sees that trend continuing after a drop in the fourth quarter. While overall earnings will increase in the first quarter of 2024, the market research firm believes the key drivers will be Nvidia and Amazon.com.AMZNGoal and Alphabet.
If we remove them, earnings will fall to 3.2% from the company’s 6.7% year-over-year gain, senior earnings analyst John Butters wrote last week.
Meanwhile, Goldman Sachs chief economist Jan Hatzius believes the surprise of 2023 has been the resilience of many economies, especially the US economy, despite the Federal Reserve moving its key interest rate from almost 0% to 5.5% to 5.75%.
The investment house also believes that the US and global economies will be better off if rates are not at zero but at the levels that prevailed before the 2008-2009 financial crisis. And he doesn’t think the Federal Reserve will cut interest rates next year unless something bad happens.
Something bad could include:
- Violence continues both in the Middle East and between Ukraine and Russia and the threat of fighting will expand.
- Weakness in the domestic real estate market due to limited supply, high prices and affordability issues, and high mortgage rates.
- Pressures on the banking system as many mid-sized banks overinvest in office real estate loans. The problem: Office vacancies are probably at their highest levels since the early 1980s.
- Tensions in the automobile markets. Electric vehicles, which many enthusiasts see as a crucial element in moderating climate change, are not selling as well as many manufacturers would like.
- Many consumers are stressed by difficulties in coping with inflation that broke out when the Covid-19 virus subsided.
- Tensions between the United States and China.
