Stocks climbed while bond yields fell as an unexpected slowdown in inflation fueled bets that the Federal Reserve’s aggressive hiking cycle is now over — and the next move will be a cut in mid-2024.
More than 95% of S&P 500 companies rose, with the gauge around 2%. Tesla Inc. led gains in megacaps and Nvidia Corp extended its rally into a 10th straight session. Financial stocks also saw big advances, particularly regional banks, which jumped 7%. The Russell 2000 index of caps added 4.5%. Two-year yields plunged 20 basis points to around 4.85%. The dollar fell 1%, the most since January.
The consumer price index also added to the “Goldilocks story”, with the economy remaining resilient and disinflation allowing the central bank to ease policy in 2024. Fed swaps indicate that the odds of another hike in the current tightening cycle have fallen to almost zero – with the market now pricing in a 50 basis-point rate cut by July from the current level of 5.25% to 5.5%.
According to Chris Zaccarelli at Independent Advisor Alliance, whether or not the economy can stay out of recession remains to be seen, but the market should continue to rally as investors begin to accept the view that higher rates are off the table.
“The last few investors, not convinced the Fed is done, are probably ‘throwing in the towel,'” said Bryce Doty at Sit Fixed Income Advisors. “The Fed’s next action is more likely to be a cut next summer than another rate hike.”
The fall in inflation suggests that recent monetary policy has done its job, making the prospect of a “soft landing” increasingly likely, according to Richard Flynn at Charles Schwab UK. The news makes it more likely that officials will “hold back” from further tariffs, he noted.
“With the US economy holding up, the inflation data is a ‘soft landing’ for the stock markets,” said Neil Dutta, head of economics at Renaissance Macro Research.
An intact disinflation process means the Fed can “sit tight for now” — which would lower the risk of “too restrictive a policy,” said Lauren Goodwin at New York Life Investments.
However, “we would turn away investors before getting too enthusiastic,” Goodwin noted. “Financial conditions are now weakening again, which is keeping the Fed on guard and very dependent on data.”
Equities rallied in November on bets the Fed is making on a rate hike, with the S&P 500 up more than 7% over the course – and heading for its best month since October 2022.
In the past 22 years, when the S&P 500 was up 5% or more by mid-November, the rest of that year was positive every time, according to data compiled by Bloomberg. Go back 50 years, and that arrangement was positive 26 out of 30 times, with the decline in the four exceptions being 1% or less.
“We need to see more months with soft inflation data, but the stock and bond market is celebrating today,” said Gina Bolvin, president of Bolvin Wealth Management Group. “We’re set up nicely for a year-end rally.”
Meanwhile, investors have become the most bullish on bonds since the global financial crisis amid “substantial conviction” that rates will fall in 2024, according to Bank of America Corp.’s latest fund manager survey. The survey showed investors dumping cash to hold the largest overweight position in bonds since 2009.
Bond giant Pacific Investment Management Co. – among the many whose expectations for a rally this year were disappointed – renews the call for 2024.
Bonds have “rarely been as attractive as they seem today” relative to stocks, Pimco managers Erin Browne, Geraldine Sundstrom and Emmanuel Sharef say in a new report predicting a “prime time” for the asset class in 2024.
Traders are also keeping an eye on another slew of Fed speakers to think about the latest data and how that would affect the central bank’s next steps. Thomas Barkin, president of the Federal Reserve Bank of Richmond, said he was not convinced inflation was on a clear path to the central bank’s 2% target despite “real progress” in curbing pressures in recent months.
Elsewhere, oil rose on bets that a halt in interest rate hikes would improve the outlook for demand, with a weaker dollar making goods priced in the currency more attractive to buyers. Gold and copper also gained.