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December 11, 2023

“The most important quality for an investor is temperament, not intellect.”

Warren Buffett


Short and sweet, Stocks rallied on Friday following moderately strong, jobs data. The major indexes each rose putting them all in positive territory for the week — their sixth straight weekly gain. The S&P finished up .88%, the Dow Jones Industrial Average gained .44%, the Nasdaq added .69%.  Internationally, the FTSE100 was up .33% and the MSCI-EAFE squeaked out a .01% gain. For both the S&P 500 and Dow Jones Industrial Average, it is the longest weekly winning streak since 2019. 2-Year Treasury yield closed at 4.875% and the 10-Year finished at 4.26%.

Equities have benefitted from a risk-on tone going into year end, which has been driven by falling 10-year Treasury yields and optimism around the Federal Reserve potentially cutting interest rates in the year ahead. That hinges on whether inflation continues to ease.

The Friday gains followed better-than-expected payrolls data from the Bureau of Labor Statistics, which said that nonfarm payrolls rose 199,000 in November, an acceleration from October. Economists were expecting 175,000 new jobs, according to FactSet. November’s robust jobs report served as a reminder last Friday of the tough path of the “last mile” in getting inflation down to the Fed’s 2% annual target.

The end of multiple labor strikes helped boost the gains. “Manufacturing experienced an uptick of 28,000 payrolls largely due to the conclusion of the United Auto Workers strike against Ford Motor, General Motors, and Stellantis, rather than new job growth, “noted Barrons Columnist Megan Leonhardt.

The unemployment rate is now 3.7%, down from last month’s 3.9%.

Further, Alex Rule, also of Barrons, commented “Stocks’ response to the employment report suggests that investors have grown less worried about the Federal Reserve’s response to strong data. Good news is increasingly being seen as good news.”

In other economic data released Friday, the University of Michigan’s gauge of consumer sentiment rose to a preliminary reading of 69.4 in December, its first increase in five months. Inflation expectations also moderated; the university’s survey of consumer sentiment showed. Such a big swing for a single reading of the survey is unusual, said Claudia Sahm, a former Federal Reserve economist who now runs a consulting business. “These data usually don’t move like that,” she said during a phone interview with MarketWatch. (Ironically, explaining why, she appeared to contradict her own rule on early recession indicators, which many on the street follow.) There are lot of factors behind the increase in consumer confidence, a solid job market and declining gasoline prices are mentioned most often by economists. Stock prices, which have also been strong, also help. For the Debbie downers… despite the gains, sentiment is still well below pre-pandemic levels.

This week’s economic calendar will include a reading on U. S. inflation from the consumer-price index as well as the outcome of the Fed’s two-day policy meeting, scheduled to conclude Dec. 13. All bets seem to be that the Fed will continue the pause on rate increases as good economic news may finally be construed as good economic news.

The same report noted that consumers are ratcheting down their inflation outlook. The latest University of Michigan survey showed that inflation expectations dropped to 3.1% from 4.5% last month. “The current reading is the lowest since March 2021 and sits just above the 2.3-3.0% range seen in the two years prior to the pandemic,” the report said.

Supporting that opinion, it is just one more data point for the Federal Reserve to consider when it meets next Tuesday and Wednesday to determine its next rate decision. The market widely expects policy makers to keep the target rate steady at 5.25% to 5.50%.

Anything that further cements the market’s view for a first rate cut in March will likely support stocks and improve the chances of a continued Santa rally. But the risks are now skewed more to the downside.

The Fed is unlikely to entertain the idea of a March rate cut when it meets next week. It may stick to its “wait and see” narrative, or even reiterate that more work needs to be done to tackle inflation. The market may not believe much of it anyway, since it has mostly disregarded rhetoric that rates could stay higher next year.

Where is the market going next year?

One of Wall Street’s biggest bulls thinks the market can navigate that middle ground. Fundstrat’s head of research Tom Lee says the S&P 500 can reach 5,200 by the end of next year as falling inflation sees interest rates move lower, while the economy “probably” avoids a recession.

Lee’s antithesis is JPMorgan’s chief market strategist Marko Kolanovic, who has been bearish on stocks for much of the year. He agrees with Lee that interest rates will likely fall in 2024 as the economy slows — the 10-year Treasury yield may fall to 3.75%, he reckons — but he warns it will reflect a scenario that is bad for equities.

“Should investors and risky assets welcome an inflation decline and bid up bonds and stocks, or will the fall in inflation indicate that the economy is sliding towards a recession? We think that the decline in inflation and economic activity that we forecast for 2024 will at some point make investors worry or perhaps even panic,” he told clients in a note on Thursday. We are confident that history should help ad despite the continued volatility the market should look to a positive 2024.

A bit on Oil…

Oil futures finished higher last Friday, but still posted a seventh-straight weekly loss — the longest streak of weekly declines since 2018. Oil prices have been under additional pressure since an underwhelming Nov. 30 OPEC+ meeting that offered more voluntary cuts for the first quarter of 2024.  At the meeting, OPEC+ producers agreed to voluntarily cut around 2.2 million barrels a day (mbd) of crude from the market in the first quarter of next year. That pledge included a widely expected extension of Saudi Arabia’s 1 mbd voluntary output cut and Russia’s 300,000 barrel-a-day cut to crude exports. Some credit the rise in prices on Friday to verbal support from Russia and Saudi Arabia. What does it mean? Enjoy the lower gas price… for now.

On Mortgage rates….

November’s sharp pullback in 30-year fixed mortgage rates may not last if the labor market remains strong, said Mark Palim, deputy chief economist at Fannie Mae. Homebuyers can benefit from a robust labor market and the near 80 basis point decline in mortgage rates since the end of October, Palim said. But if the “labor markets remain this strong, we believe the pace of mortgage rate declines will likely not continue in the near term or may partially reverse,” he said in a statement to MarketWatch.

The benchmark 30-year fixed mortgage rate was edging down to 7.05% last Friday, after surging to nearly 8% in October, according to Mortgage Daily News.

I will remind all to remember where both gasoline price and mortgage rates where a few short years ago, both affect the average American’s quality of daily life.