'Heaven Without Hell'
An all-time monthly performance for stocks... The 'Fed pause' trade continues... The value of a plan... What to watch next... Friday's jobs report is important... It's 'heaven without hell'...
Last month made stock market history...
The S&P 500 Index rose nearly 9% in November, good enough to crack the list of the 20 best monthly performances for the U.S. benchmark since 1950...
And a lot of this performance happened in less than two weeks...
As I (Corey McLaughlin) noted in the November 6 Digest – titled "This Could Be the Start of Something Big" – the market was up 5% in the previous five trading days after having flirted with its long-term moving average near the end of October.
We shared the following simple chart of the S&P 500 with its 200-day and 50-day moving averages a few times over the past few months. Compared with five weeks ago, the picture for U.S. stocks looks much, much better...
As we wrote last week, momentum still favors the bulls... And, as we'll explain today, a lot of it appears to be associated with rising expectations for the "Fed pause" – or the Federal Reserve maintaining current interest-rate policy – to continue.
Remember, in similar periods in history, when the central bank stops raising the "cost of money" in the economy, the U.S. benchmark index has typically seen double-digit gains before it stops making new highs...
A broad 'risk on' rally...
As our DailyWealth Trader editor Chris Igou wrote to his subscribers on Friday, last month saw a broad rally with 10 of the 11 major S&P 500 sectors finishing positive. As Chris noted about November's performance...
Information technology, real estate, and consumer discretionary stocks led the market higher.
These sectors were up 12.7%, 12.3%, and 10.8%, respectively. Meanwhile, utilities, consumer staples, and energy stocks rounded out the bottom.
Energy was the only sector with a loss – down 1.7%. The chart below has the full rundown...
So, tech, real estate, and consumer discretionary stocks led the way, and real estate actually had its best month in 12 years...
These are all "risk on" signals for various reasons, especially when we consider the significance of the future path of interest rates on the market today (and always, really). As Chris continued...
While the rally in technology stocks wasn't surprising, real estate stocks coming in second place was.
This all comes down to the 10-year Treasury yield's move in November. (Real estate stocks are sensitive to interest-rate changes.)
If the 10-year Treasury yield falls, that's positive for these stocks. This is mainly because 30-year mortgage rates are based off of 10-year yields. Long-term rates were at 4.9% to start November and have since fallen to 4.3%...
We'll keep a close eye on these rates this month. A continued fall in the 10-year yield will likely push the real estate sector even higher.
Before getting into what's next, I want to briefly share some kudos...
Real-time trading...
At the end of October, we urged folks to not panic. Yes, we were seeing signs of pre- or early-recession behavior and long-term yields hitting new highs. But there were also indications that the summer and early fall sell-off in stocks of about 10% might have reached its low point.
We cited the analysis of the short-term traders on our team like Chris and Ten Stock Trader editor Greg Diamond. They were preaching patience and, in fact, even saw upside ahead within a longer-term trend...
Based on his technical analysis, Greg wrote on November 2 that the "bottom is confirmed." And in late October, Chris noted that while the S&P 500 and tech-heavy Nasdaq had sold off below their 200-day moving averages, their overall trend was still up for the year.
I wrote on October 30 that we would closely track the indexes over the following week, "given the key inflection point" that Greg and Chris saw. Well, we did, and their bullish advice was prescient.
In Ten Stock Trader in November, Greg closed seven winning trades in eight consecutive trading days, averaging a gain of around 20%. In DailyWealth Trader, Chris kept subscribers in a bullish trade in U.S. stocks that's up nearly 10% since May...
Again, we'll reiterate what we said in early November because it can't be said enough...
This is a perfect example of why you want a plan and a decision-making process for any of your investments, be they short-term trades or long-term holdings.
Preparation and conviction can prevent you from selling at the wrong time... and allow you to buy at the most opportune time when everyone else is scared. This could go for beaten-down stocks or assets like corporate bonds, which could take a hit in a recession.
What to watch next...
Now, after one of the best months for U.S. stocks in the past 70-plus years, there's reason to believe the market might be due for a breather. Still, that doesn't have to happen.
Longer-term yields (10-year and 30-year) fell in November as enough investors increasingly expected the Fed to cut interest rates within the next six months and the Treasury announced plans to not issue as many new bonds as previously expected... Another factor is the signs of a labor market starting to weaken (a reason for the Fed to not raise rates more).
Market eyes are now turned to the Fed's next meeting in 10 days...
On Friday, Fed Chair Jerome Powell was back out publicly speaking at a function. The bullet points he delivered stated that while the pace of inflation has come down, the central bank has not taken further rate hikes off the table.
Investors didn't buy it. In fact, they appeared to take his comments as a signal that rate cuts will be more likely to come in early 2024... given the context of inflation numbers still coming down in general. Nearly every asset class finished higher Friday, getting a boost from a relatively lower-trading U.S. dollar. Notably, gold and bitcoin hit new highs.
Federal-funds futures traders continue to bet with around 99% certainty that the Fed is done raising interest rates. Instead, they think rate cuts are coming in the next six months.
At the same time, short-term Treasury rates – which are more sensitive to current interest-rate policy – have remained steady. Thus, the yield curve continued to "revert." As I have taken every opportunity to repeat, this is typical pre-recession or early-recession behavior.
In short, the bond market and other asset classes appear to be saying the same thing... A recession is coming or has already started, and the Fed will cut rates when this downturn becomes more apparent.
Meanwhile, the stock market – since October's low – has looked like a place for folks to enjoy gains... for now. Eventually, the "bad news," like perhaps a rising unemployment rate, a significant blow to companies' earnings forecasts, or another unexpected event or risk, could become too bad for stockholders to ignore.
The next jobs report...
We wrote just last week about indicators of a softening jobs market, like seasonal hiring being way down from previous holidays and the unemployment rate slowly drifting higher over the past few months.
One reliable recession indicator is the Sahm rule. As we've explained, it basically says that whenever the government's unemployment rate rises 0.5 percentage points off a cycle low in a year, we're in a recession. The cycle low so far has been 3.5% in January and April...
With 3.8% unemployment in September and 3.9% in October, there are a couple ways this indicator could be triggered.
First, unemployment could hit 4.2% in November – to make a three-month average of 4% for a 0.5 percentage-point gain. Alternatively, the unemployment rate could gradually tick higher to average 4% over the next several months – which seems entirely possible.
On Friday, we'll see the latest November jobs number, or nonfarm payrolls, from Uncle Sam – and investors will be scrutinizing it.
It's 'heaven without hell' for now...
Ritholtz Wealth Management CEO and noted market commentator "Downtown" Josh Brown, who spoke at our annual Stansberry Research conference in October, published a piece this morning setting the scene.
He called the previous jobs report covering October, which was published in early November, a turning point. The number of new jobs added was less than expected, and the headline unemployment rate moved higher.
The numbers hit the market amid the bounce of the S&P 500's most recent lows on November 3. In Josh's view, the report – which showed "labor market moderation" – "was the spark" for stocks' recent moves.
We would argue other factors were involved... But that doesn't discount his point about the jobs market's influence on the path of stocks over the past month and, likely, in the months ahead. It all contributes to the idea of a "Fed pause" and the timing of possible rate cuts in the future...
Because, as Josh wrote, for now...
With job openings still plentiful and a consumer still spending at a positive rate despite higher borrowing costs, the Goldilocks scenario became consensus. By which I mean, it became non-embarrassing for economists and stock market watchers to posit that perhaps this time, we'll have inflation normalize without a recession. Ed Yardeni calls this idea the "Immaculate Disinflation." Heaven without Hell. Price pressures subside without millions of layoffs being necessary.
Can you have heaven without hell? We're not so sure. Stocks don't trade on the Utopia Stock Exchange, though it may often feel or look that way. Yet for now, "bad news" can be "good news" for stocks because it means a prevailing enough hope for a Goldilocks environment... or a "soft landing," or whatever you want to call it...
And while this sentiment can't last forever, it might remain for a little while longer.
As Josh also pointed out, there's not much else on the economic-data schedule that should derail the prevailing narrative in the next month or so. The next consumer price index ("CPI") data will be published on December 12 and is likely to show continued disinflation, and the Fed will make its next policy announcement the following day.
And then, it's time for eggnog, for those who like that sort of thing. So, we'll want to see what comes of Uncle Sam's latest jobs numbers at the end of this week, because they could set the stage for whether stocks could keep moving higher following a record-best month.
New 52-week highs (as of 12/1/23): Alamos Gold (AGI), A.O. Smith (AOS), Cencora (COR), Salesforce (CRM), Cintas (CTAS), CyberArk Software (CYBR), Enstar (ESGR), Expedia (EXPE), SPDR Gold Shares (GLD), Ingersoll Rand (IR), Iron Mountain (IRM), iShares U.S. Aerospace & Defense Fund (ITA), Kinross Gold (KGC), London Stock Exchange Group (LNSTY), Motorola Solutions (MSI), Palo Alto Networks (PANW), UiPath (PATH), Parker-Hannifin (PH), PulteGroup (PHM), Sprott Physical Gold Trust (PHYS), Phillips 66 (PSX), Qualys (QLYS), Ryder System (R), Rithm Capital (RITM), Roper Technologies (ROP), Invesco S&P 500 Equal Weight Technology Fund (RSPT), Sherwin-Williams (SHW), SPDR Portfolio S&P 500 Value Fund (SPYV), Stellantis (STLA), StoneCo (STNE), Sprott Physical Uranium Trust (U-U.TO), Vanguard S&P 500 Fund (VOO), and Waste Management (WM).
In today's mailbag, feedback from Stansberry Alliance members on an update that our Director of Research Matt Weinschenk e-mailed on Friday (Alliance members, be sure to read it – the message should have hit your inbox around 1 p.m. Eastern time on December 1)... and another note about legendary investor Charlie Munger, who passed away last week at age 99... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Thank You, Thank You, Thank You! I have been agonizing about everything going on in our country and what will happen to the stock market! Today I read 'An Update to Your Alliance Partnership' and feel more at ease knowing that I have the Best of the Best to help me and all the Alliance Members through what's ahead in the markets! Keep up the good work!" – Stansberry Alliance member Nancy P.
"I am so glad Stansberry has finally realized that 'more' is not always better. While I enjoy many of the newsletters, I can't keep up with them, even if I spend 3 to 4 hours a day and I have many other things to do..." – Stansberry Alliance member Guy N.
"OUTSTANDING!! I personally agree with all of the recent changes including those outlined in the latest Alliance update. I have only been an Alliance member for the last several years but the improvement in my investment strategy and overall performance is impressive, at least to me. And, it has been a difficult market period as you all know and talk about..." – Stansberry Alliance member Walt W.
"Charlie Munger was both a class act and an inspiration to live your life by. My best wishes to his loved ones in sympathy. RIP. A life very well lived." – Subscriber John M.
All the best,
Corey McLaughlin
Baltimore, Maryland
December 4, 2023