All hail November which saw interest rates, gasoline and oil prices all fall and stocks overall enjoy their biggest gains in a year.
The rebound from a correction that erupted at the end of July was startling, to say the least.
The Standard & Poor's 500 Index (^IN) -) finished at its highest level of the year on Dec. 1 after jumping 8.9% in November — its best monthly showing since July 2022. For the year, the index is up 19.7%.
Related: After a big November for stocks, December should bring more holiday cheer
The Nasdaq Composite's (^COMPX) -) gain of 11.3% was its best since July 2022 as well. It's up 36.7% this year.
The Dow Jones Industrial Average's (^DJI) -) gain was 8.8% and, at the end of the week, was up 9.4% for the year.
The small-cap Russell 2000 Index was going nowhere when it ended at 1,637 on Oct. 27. It's up 13.8% since.
While one can rejoice in the glad tidings, always remember: Stocks seldom rise in a straight line. Oil prices can suddenly shoot higher. Wars can erupt. The recovery from a pandemic can strain and stretch all of the pieces of business activity that make the global economy function smoothly. And the price of money will become much more dear.
As a result, while investors, money managers and analysts are mostly bullish about December with lower bond yields, lower oil and gasoline prices, they know bad things can happen.
There are some challenges immediately ahead, especially:
- What the U.S. jobs report for November will show on Dec. 8.
- What the Federal Reserve decides about interest rates on Dec. 13.
Learn to love a weak jobs report
A weak jobs report would, in a perverse way, be good for stocks because it would let the Fed leave interest rates alone. A strong jobs report, by contrast, would make the Fed watch more carefully for a re-ignition of inflation pressures.
The Fed's key federal funds rate has been at 5.25% to 5.5% since July. The Fed started to raise rates rapidly in early 2022 to try to kill the worst inflation since the 1980s.
The rate is what the central bank want banks to charge fellow institutions for overnight loans to meet regulatory requirements.
Agreed, this sounds wonky, but the cost of those financings is the foundation of how U.S. interest rates are formulated. And that impacts mortgage rates, car loans, and more.
Related: New report highlights a major speedbump to mass electric vehicle adoption
The jobs report is based on data collected by the middle of each month. So, there's a lag to start. One month's data is revised twice after originally issued as more information comes in.
The reports for September and October have already been revised downward by a total of 101,000 from their original reports. The average monthly job gains since 2021 have dropped from 578,000 in 2021 to 263,000 this year,
Confirming the data is anecdotal evidence of some slowing in the economy.
Tech companies have been trimming staffs. Construction employment has slipped because fewer homes or apartments are being built, and office construction has slowed. Gasoline prices are 16% since mid-September and nearly unchanged for the year, according to AAA's Daily Fuel Gauge Report.
Still, projections are that the November jobs report will show the national unemployment rate holding at 3.9% with an estimated 175,000 jobs created during the month. The unemployment rate has been below 4% for nearly two years.
While, yes, the estimates will be revised later on, the initial report will grab the attention of both markets and the Fed, which starts its two-day meeting on Dec. 12.
The Fed last raised rates in July and left them alone at meetings in September and November because inflation pressures created by the pandemic recovery have been easing.
While Federal Reserve Chairman Jerome Powell pointedly warned this past week the time is not right to cut rates yet, he did not suggest rates will move higher. Unless there's a problem. Which he is practically obligated to say.
But lower rates are coming, and markets and traders know it. The CME FedWatch Tool now sees the first rate cut coming at the Fed's March 19-20, 2024, meeting.
Why buy now?
The problem investors face between now and the first cut in the spring is to ask themselves if now is a good time to buy stocks aggressively. And there was a little evidence that the question was afoot at the end of this past week, particularly with tech stocks.
The Nasdaq Composite and the Nasdaq-100 (^NDX) -) indexes both seemed to wobble midweek. The Nasdaq-100 itself hit a number of 52-week highs but did not turn in feverish performances.
Apple (AAPL) -), Microsoft (MSFT) -) and chip-maker Nvidia (NVDA) -) and Meta Platforms (META) -) all finished the week lower.
Relative strength indexes for the Dow and S&P 500 surged above 70, a signal that the stocks in the index are getting too pricey. The Dow's RSI hit an alarming 80 on Friday, suggesting the average is quite close to a pullback.
At the same time, Bank of America Securities analysts also warned about too much market exuberance, noting that 62% of global stock indexes are over their 50-day and 200-day moving averages.
What else is coming in the week ahead?
The bulk of the third-quarter earnings season is done, and it has mostly cheered investors. Near the end of November, with 94% of S&P 500 companies reporting, 82% had beaten analyst estimates, better than the 5-and-10 year estimates, according to FactSet data. The margin of the beats was 7.1%.
Biggest contributors to the gains: Financials, Consumer Discretionary, Information Technology, and Communication Services sectors. Healthcare is a laggard.
The outlook for the fourth quarter is for overall earnings gains of 2.9% from a year ago.
Biggest stocks reporting in the week ahead: mining giant BHP Group (BHPLF) -) and Toll Brothers (TOL) -); on Tuesday; spirits maker Brown Forman (BF.A) -) on Wednesday; and Broadcom (AVGO) -) and lululemon athletica (LULU) -).
In addition to the jobs report are reports on motor vehicle sales on Monday; and mortgage data on Wednesday.
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