Stocks Rally, Yield Decline, And Prospects Of Rate Cuts

U.S. stocks ended the week with marginal changes, marking a three-week streak of gains amidst a backdrop of declining Treasury yields.

Optimism surged among investors following favorable inflation data and statements from Federal Reserve officials, hinting that the Fed might halt its hiking cycle, potentially moving toward rate reductions sooner than previously anticipated.

The anticipated timing for the first rate cut has shifted from July to June.

Throughout the week, US 10-year yields dipped by 21 basis points, aided by oil prices maintaining below the $80 per barrel threshold, fostering confidence that inflationary pressures are abating.

The head of the world’s largest retailer, Walmart’s Chief Executive Officer Doug McMillon, indicated during the earnings call a potential decline in consumer prices, even suggesting the likelihood of managing through a period of deflation in the coming months.

Meanwhile, Europe’s sluggish economic performance has led traders to bet on a hastened pace of interest rate cuts in the upcoming year.

For the first time, money markets have factored in a full percentage point of interest-rate cuts for 2024.

In terms of market performance, the Dow Jones index saw a 1.9% rise, the S&P 500 surged by 2.2%, and the Nasdaq Composite climbed 2.4% over the week. Over the past three weeks, the Dow gained 7.8%, the S&P surged by 9.6%, and the Nasdaq jumped by 11.7%.

Here are the closing levels on Friday, November 17th, 2023: 

Last  Change  Change% 
DOW JONES  34,947.28 +1.81 +0.01%
S&P 500 4,514.02 +5.78 +0.13%
NASDAQ 14,125.48 +11.81 +0.08%
U.S. 10Y 4.435%
VIX 13.8 -0.52 3.63%

After a three-week selling spree, the market has now experienced three consecutive weeks of buying, transitioning from oversold to overbought conditions.

The evident surplus in buying compared to selling implies a potential upward trend in prices, fostering positive sentiment among market participants.

Despite these positive indicators, it is worth noting that while technical aspects, such as the S&P comfortably above the 4500 mark and its 100- and 200-day moving averages, are promising, these trends align with expectations of a soft landing for the economy.

Despite these positive indicators, it’s crucial to note that while technical aspects, such as the S&P comfortably above the 4500 mark and its 100- and 200-day moving averages, are promising, these trends align with expectations of a soft landing for the economy.

This notion hinges on the belief that inflationary concerns will dissipate and that the economy remains resilient despite the Fed’s previous rate hikes.

However, the recent softening of economic data and current oil prices might signal underlying issues.

A sustained decline in demand could potentially lead to an economic downturn and, if persistent, even a recession.

Curiously, discussions about a potential recession seem absent amidst investors’ overwhelming interest in stocks over the past few weeks, projecting a rosy future despite looming uncertainties.

While the current momentum may continue driving prices upward until the year-end, exercising caution remains prudent.

Historically, when everything appears secure, unexpected shifts tend to redefine the market landscape.

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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