A look at the inflation report; When Bond Yields Dropped, the Everything Rally Kicked Off; 'The strongest labor market we'll see in my lifetime'; Highlights from Charlie Bilello's latest Week in Charts; Stress is weathering our bodies from the inside out; Good stress

1) The government issued its inflation report for November this morning and there were no surprises – prices were flat compared with October and up 3.1% year over year ("YOY"). Here's the New York Times with the story: Inflation Holds Steady Ahead of Fed Meeting. Excerpt:

Inflation data released on Tuesday showed that price increases remained moderate in November, the latest sign that inflation has cooled substantially from its peak. That's likely to keep the Federal Reserve on track to leave interest rates unchanged at its final meeting of the year, which takes place this week.

2) Inflation falling rapidly and remaining muted – which is exactly what I predicted a year ago – has led the U.S. Federal Reserve to pause raising rates.

This has triggered a sharp rally across a wide range of assets, as this story on the front page of today's Wall Street Journal highlights: When Bond Yields Dropped, the Everything Rally Kicked Off. Excerpt:

Investors spent most of 2023 fretting about inflation and interest rates. Now they are snapping up everything from stocks and bonds to crypto and even gold.

The simultaneous surge across assets has sparked debate about whether the "everything rally" marks the arrival of a lasting bull market – or just a fleeting sugar high at the end of the Federal Reserve's tightening cycle.

At the start of the year, interest rates were rising and Wall Street was bracing for a recession. Major stock indexes rallied, driven largely by the "Magnificent Seven" group of technology stocks, but most other sectors languished.

Now bond yields are plunging, and investors sense the Fed's fight against inflation is winding down. The drop in yields has led to a broad rally: Some of the market's most beaten-down sectors, including property stocks and regional banks, are leading the way.

"The economy is slowing, but it's not cracking," said Jason Draho, head of asset allocation Americas at UBS Global Wealth Management. "All of which means the concern about the Fed hiking any more, that's off the table."

The S&P 500 has advanced 12% from its Oct. 27 low to reach its highest level of 2023 and extend its year-to-date gains to 20%. The blue-chip Dow Jones Industrial Average, which had lagged behind for much of the year, is less than 2% from its January 2022 record. And the Nasdaq Composite, which fell farther than the other indexes on the way down, has paced its peers with a 38% gain in 2023.

In the bond market, the yield on the benchmark 10-year U.S. Treasury note has fallen to 4.238% from 5.021% on Oct. 23 as prices have risen. U.S. government bonds returned 3.44% in November, marking their third-best monthly performance since 1989, according to UBS.

The rally has extended to cryptocurrencies. Bitcoin traded above $44,000 last week for the first time since April 2022. This time the money followed the trade. Digital asset fund inflows have totaled $1.76 billion over the past 10 weeks, according to data compiled by crypto asset manager CoinShares. That is the highest level since October 2021, when the first bitcoin futures-based exchange-traded fund launched in the U.S.

Of course, that brings up the question every investor is asking...

Does this rally have legs... or is it being driven by short-term factors such as nobody wanting to sell now because, if they just wait until January, they can defer paying capital gains for another year?

My view is the former.

I remain constructive on stocks because I think the macroeconomic conditions are so favorable on every important metric: economic growth, unemployment, interest rates declining, the Fed holding rates steady and, at some point next year, likely cutting, etc.

3) One of my favorite bloggers, Ben Carlson, published some wise thoughts earlier this week – titled 8 Things I Think I Think – especially about the labor market and the possibility of improving consumer sentiment next year. Excerpt:

1. I think this is the strongest labor market we'll see in my lifetime. Since the Fed began raising rates in March 2022, the U.S. economy has added more than 6 million new jobs. This year we've added 2.5 million jobs.

The whole idea of rate increases was to slow consumer demand which would cause companies to cut back which would lead to job cuts which would slow inflation.

And yet...

We've now experienced 22 months straight with the unemployment rate below 4%.

That hasn't happened since the 1960s. The unemployment rate was never below 4% even once during the 1970s, 1980s or 1990s.

We might never see a labor market like this again for a long time.

Enjoy it while it lasts.

2. I think we could see much higher consumer sentiment numbers in 2024. Economists have been heavily debating why consumer sentiment is so wretched despite a resilient economy.

As fun as this debate has been, I'm hopeful 2024 will see a spike in consumer sentiment towards the economy.

Gas prices are falling. The inflation rate is steadying. Mortgage rates are falling (and will hopefully fall further). The Fed is probably going to cut rates in the first half of 2024. Wages are growing faster than inflation again.

Assuming we avert a recession yet again, I'm bullish on consumer sentiment in 2024.

4) Another one of my favorite bloggers, Charlie Bilello, just released his always excellent The Week in Charts – I'll share some of my favorite charts and bullet points from this edition below...

Like Carlson, Bilello highlights the streak of a near-half-century-low unemployment rate. However, he also points to signs that the labor market is cooling, from overheated (and inflationary) to very strong, which is good news for investors:

The number of US Job Openings fell to 8.7 million in October, the fewest since March 2021.

The number of job openings still exceeds the number of unemployed persons in the US, but the gap is narrowing. The 1.3 job openings per [unemployed] person is the lowest since August 2021.

The 1.8% increase in total jobs over the last year was the lowest YoY growth rate since March 2021.

Bilello also notes that mortgage rates have fallen quite a bit in the past six weeks – more good news:

The 30-year mortgage rate in the US has declined for 6 consecutive weeks, moving from its highest level since 2000 (7.79%) down to 7.03%.

Meanwhile, he notes that used car and gasoline prices are down:

Asking prices for used cars in the US are at their lowest levels in 29 months, down 10% from the peak in July 2022.

Traveling by car is getting less expensive too, with gas prices in the US moving down to $3.20/gallon (national average). That's the lowest level we've seen this year.

Lastly, Bilello highlights the huge discrepancies between certain types of stocks, which is what I love to see as I look for bargains in out-of-favor sectors:

• Large vs. Small: The S&P 500 is outperforming the Russell 2000 by 13.7% in 2023. In the last 30 years, large cap outperformance has only been higher two times: 1998 (31.1% spread) and 2021 (13.9% spread).
• US vs. International: The S&P 500 (+21.3%) is outperforming MSCI EAFE (+13.6%) by 7.7% this year. From 2010-23, the S&P 500 has outperformed in 11 out of 14 years w/ a cumulative total return of 440% vs. 112% for MSCI EAFE.
• Growth vs. Value: Growth stocks are outperforming Value stocks in 2023 by 30%, the 2nd biggest outperformance on record with data going back to 1979 (only 2020 was bigger). Driving this spread has been the huge advance this year in Technology shares which now have their highest relative performance versus the broad market since March 2000.
• Submerging Markets

The ratio of Emerging Markets to US Equities hit a 22-year low last week, moving back to November 2001 levels.

5) This in-depth story in the Washington Post highlights the many deleterious impacts of stress: Stress is weathering our bodies from the inside out. Excerpt:

Physicians and public health experts have pointed to one culprit time and again when asked why Americans live shorter lives than peers in nations with similar resources, especially people felled by chronic diseases in the prime of life: stress.

A cardiologist, endocrinologist, obesity specialist, health economist and social epidemiologists all said versions of the same thing: Striving to get ahead in an unequal society contributes to people in the United States aging quicker, becoming sicker and dying younger.

Recent polls show adults are stressed by factors beyond their control, including inflation, violence, politics and race relations. A spring Washington Post-Ipsos poll found 50% of Americans said not having enough income was a source of financial stress; 55% said not having enough savings was also a source of stress.

"We should take a step back and look at the society we're living in and how that is actually determining our stress levels, our fatigue levels, our despair levels," said Elizabeth H. Bradley, president of Vassar College and co-author of the book "The American Health Care Paradox." "That's for everybody. Health is influenced very much by these factors, so that's why we were talking about a reconceptualization of health."

The Washington Post's efforts to gain a deeper understanding of how stress can cause illness, disability and shorter lives led to a once derided body of research that has become part of the mainstream discussion about improving America's health: the Weathering Hypothesis...

She said she was trying to capture two things. First, that people's varied life experiences affect their health by wearing down their bodies. And second, she said: "People are not just passive victims of these horrible exposures. They withstand them. They struggle against them. These are people who weather storms."

People seem to instinctively understand the first, but she said they often overlook the second. It isn't just living in an unequal society that makes people sick. It's the day-in, day-out effort of trying to be equal that wears bodies down.

However, I would add one caveat to this...

I have a lot of stress in my life mostly because I'm wildly overcommitted and travel constantly. But I don't think this stress is harming me because I have agency.

I choose to live the busy life that I do and derive enormous meaning and joy from almost all of my activities and travels. And if I ever feel that it's too much, I can quickly and easily cut back. Studies have shown that this is good stress, as opposed to the harmful types of stress discussed in the Washington Post article.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.