The big challenge for investors this year is managing how they feel about the Federal Reserve.
The working thesis for much of the year has been that the Federal Reserve would stop raising interest rates sometime in 2023 and begin cutting them in 2024.
That mentality has dominated market thinking since the central bank held its key federal funds rate steady at its September and November meetings and hinted that it had done so.
What has been done is not a closed deal. Federal Reserve Chairman Jerome Powell warned markets that if inflation reignites, the Fed will not hesitate to raise rates. The Federal Reserve’s goal, officially, is to reduce US inflation to 2% annually from a peak of around 8% in 2022. Inflation is now slightly above 3%, which Wall Street considers good enough.
And good enough to allow rates to drop next year. The CME group Federal Reserve Surveillance Tool projects that the central bank will begin cutting rates from its current 5.25% to 5.5% in March and to between 4.5% and 4.75% in December.
Maybe it’s just Wall Street talking to each other.
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The Fed could simply say, “We’re done with 5% to 5.25%. End of story.”
But predictable rates are almost as good as lower ones. The 10-year Treasury yield surpassed 5% in late October. It is now below 4.5%.
The drop in yield sparked a wave of stock buying on Oct. 27 that continued last week and should continue well into December.
What a good rally?
- The Standard & Poor’s 500 Index (^EN) – Get a free report is up 7.64% this month, potentially its best monthly performance in a year.
- The Dow Jones Industrial Average (^DJI) – Get a free report It is also enjoying its best month in a year, up 5.73%.
- The Nasdaq Composite Index (^COMPX) – Get a free report is up 9.9%, its best month since rising 10.7% in January.
Right now, however, it’s time to take a breath. Markets have some important economic and earnings reports to digest in the week of November 20.
But the reality of Thanksgiving week is that many traders and investors, money managers and traders will largely disappear starting Tuesday’s close.
Nvidia, Lowe’s and Medtronic results to be published
Except on Tuesday when chip giant Nvidia (NVDA) – Get a free report reports third quarter results. The Street estimate is that the company, a key player in the development of artificial intelligence, will report earnings of $3.01 per share, up from 34 cents a year ago.
Also reporting Tuesday: home improvement retailer Lowe’s Companies (LOW) – Get a free report and medical device maker Medtronic (MDT) – Get a free reportwhose shares have plummeted since May.
The most important economic report may be Monday’s leading economic indicators report and Tuesday’s existing home sales. Always keep in mind: buying a home means a fantastic amount of ancillary purchases later.
Wednesday’s volume will be very light. There will be a half day of trading on Friday and whatever the results are, they won’t mean much.
So, it’s time to think about December. It is the biggest month for the Dow and S&P 500 and the second biggest month for the Nasdaq.
And then comes January and with concerns that the U.S. economy is slowing, the possibility of continued violence in the Middle East, and, of course, the very real prospect of closely contested elections across the United States.
What the markets will likely do in December is rise, but perhaps not as outrageously as is happening in November.
Nasdaq-100 approaches key level
The Nasdaq-100 index (^NDX) – Get a free report is less than 100 points below the 52-week high of 15,932.05, set on July 19. The index fell approximately 11.5% between July 19 and October 26. Since then it has risen 12.7%.
Several major stocks suddenly hit new highs. The new 52-week highs all but disappeared in October.
microsoft (MSFT) – Get a free report It established four new 52-week highs between November 10 and 17. Chip giant Intel (INTC) – Get a free report It suddenly surged and also hit multiple new highs.
Among the others to hit new highs was General Electric. (G.E.) – Get a free reportRoss Stores (Rost) – Get a free reportPACCAR truck manufacturer (PCAR) – Get a free reportride-sharing giant Uber Technologies (UBER) – Get a free reportvisa credit card company (V) – Get a free report and cloud security company Zscaler (Z.S.) – Get a free reportGerman sandal maker Birkenstock, chip maker Advanced Micro Devices (amd) – Get a free report and Costco wholesale (COST) – Get a free report.
Many companies reported solid earnings or convinced investors that better results were ahead. Aim (TGT) – Get a free report jumped 19% for the week as third-quarter profits rose from a year earlier even as sales fell. Macy’s (METER) – Get a free report rose 31%.
There are risks in this optimistic scenario that may come to the fore.
A wild card that emerged late last week — the ouster of Sam Altman as CEO of ChatGPT, the artificial intelligence company — could spread throughout Silicon Valley. (Reports on Saturday night suggested that investors in ChatGPT are trying to get Altman back.)
Other risks:
- The stock could become too expensive. Not only are 52-week highs blooming, but the stock could become overbought and vulnerable to a sell-off.
- The Federal Reserve could surprise everyone and raise rates at its meeting on December 12-13, the last of 2023, or at its first meeting of 2024, on January 30-31.
- Violence in the Middle East could spiral out of control and send oil prices soaring. For the record, crude oil fell 5% or more in November after a similar drop in October. Domestic gasoline prices in the United States have fallen for 59 of the last 61 days and are down more than 10% since late October.
- Congress, which managed to avoid a partial government shutdown just last week, could descend into chaos.
- The war between Ukraine and Russia could expand quickly.
