S&P 500’s Best Week In 2023 And Fed’s Policy Shift

“On Friday, November 3rd, 2023, U.S. stocks surged, marking the S&P 500’s best week in 2023.

Both the labour market and services sector showed signs of cooling, leading investors to believe that the Fed may have concluded its tightening phase, with potential rate cuts expected as early as June.

The bond market also saw gains in prices, causing the 2-year yield to drop 15 basis points to 4.84%.

Fed swaps now indicate that traders perceive only a 16% chance of another hike by January.

Banks experienced their most substantial weekly rally since November 2020, while the U.S. dollar saw its most significant decline since July.

Oil prices dipped below $81 per barrel.

The U.S. service sector expanded at the slowest pace in five months, with job growth moderating and the unemployment rate climbing to 3.9%.

Nonfarm payrolls increased by 150,000 last month, following a downward revision of 297,000 in September.

Wage growth also slowed, with average hourly earnings rising by 0.2%, falling short of expectations. However, September’s gain was revised higher to 0.3%.

The 12-month gain in wages fell to 4.1%, its lowest level in over two years, but it remains above the approximately 3% level that policymakers often consider compatible with their overall inflation target of 2%.

The Labor Department’s quarterly employment cost index, released Monday, surprised modestly on the upside, indicating an annual increase in wages and benefits of 4.3%.

The S&P 500 and the Nasdaq 100 both had their best week of the year, with gains of approximately 6%.

The 10-year Treasury yields fell more than 25 basis points, marking the biggest weekly drop since March.

Here are the closing levels on Friday, November 3rd, 2023:  

Last  Change  Change% 
DOW JONES 34,061.32 +222.24 +0.66%
S&P 500 4,358.34 +40.56 +0.94%
NASDAQ 13,478.29 +184.10 +1.38%
U.S. 10Y 4.572%
VIX 14.91 -0.75 -4.79%

It has been an exceptional week for bullish investors, with a favourable Fed meeting, a “Goldilocks” jobs report, and no worsening of geopolitical tensions.

Last week, we discussed the markets being oversold. This week, one could argue they appear to be overbought.

The FOMO (Fear of Missing Out) buying has led to significant short-covering, instilling confidence in the bullish sentiment.

However, there is a possibility that this rally is merely a relief rally following weeks of selling.

Nonetheless, confidently selling during these rallies can be challenging when the bulls are in full force.

Technical indicators are looking more favourable, with the S&P closing above its 200-day moving average.

While momentum may continue to drive the market to even higher levels, it might be premature to celebrate.

The recent market volatility has posed challenges for both buyers and sellers. I anticipate this volatility will persist in the near term, so it would be wise to exercise caution.

Just when it appears that the bulls are disregarding all the negative news and jumping into the market wholeheartedly, unexpected developments may alter the landscape. It is prudent to trade cautiously until there is confirmation of this upswing.

Source: CBOE, Bloomberg

This commentary is written by James Gomes, a seasoned finance industry veteran with extensive experience of over 30 years, including a substantial tenure at a reputable U.S. bank exceeding 20 years.

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