What happened in the markets: 11 Dec - 15 Dec 2023
After six consecutive weeks of gains, the markets maintained their holiday spirit last week, with stocks notching their seventh week of positive returns. The S&P 500 has surged by nearly 23% for the year, largely driven by a select few mega-cap technology stocks.
However, what sets this recent rally apart is the emergence of a more diversified market leadership. Over the past month, interest-rate-sensitive segments of the market outperformed, with small-cap stocks rising over 11%, the S&P 500 real estate sector up over 12%, and high-quality dividend stocks climbing over 6% while the S&P 500 itself gained about 5%.
Last week's Federal Reserve meeting played a pivotal role in driving these broad-based movements, as it confirmed the likelihood of rate hikes being over and the possibility of rate cuts commencing in 2024. With inflation easing, yields decreasing, and the economy potentially heading towards a soft landing, the markets have much to rejoice about this holiday season. Although some gains may have been accelerated and periods of volatility are expected, we anticipate that the underperforming segments of the market will continue to catch up in the coming year.
Last week at a glance
📉 The "dot plot" reveals a merry future for rates
The anticipation was high before the Fed's last meeting of the year, with everyone eager to see the new economic projections.
Well, the Fed came through with a gift that kept on giving - the "dot plot" not only suggested that rate hikes are off the table, but it also hinted at three rate cuts in 2024. That's one more cut than the September projections showed! By 2026, the "dot plot" forecasts the fed funds rate to drop to 2.9%, a significant slide down from the current 5.25% - 5.5%.
🎅 Markets are already decking the halls for 2024
Investors have taken the Fed's forecast and run with it, now pricing in up to six rate cuts for 2024. While that's double the cheer, we think the Fed will likely take a more measured approach. Considering the economy isn't signalling a recession just yet, we're expecting a gradual descent into less restrictive rate territory, with about three to four rate cuts next year.
Fed eyeing a “soft-landing”
The Fed is eyeing a 'soft landing' for the economy, and it's all about balancing growth, inflation, and jobs. Let's unpack what this means for your wallet and your investments.
🛬 What's a soft landing?
A soft landing is when the economy slows down just enough to curb inflation without triggering a recession. It's like a pilot smoothly touching down on the runway – it's all about precision and control.
🛬 The Fed's steady unemployment forecast
The Fed's crystal ball is showing a steady unemployment rate of 4.1% through 2026. That's a tad higher than the 3.8% they're predicting for 2023, but it's still pretty stable. They're forecasting lower economic growth and inflation next year, but they don't see a big spike in joblessness. No wild swings here – just a gentle coasting.
🛬 Powell's take on the labor market
Chairman Jerome Powell has noticed the labor market finding its equilibrium. More folks are clocking in after the pandemic break, and immigration is giving the workforce a boost. On the flip side, the demand for labor is taking a breather, with job openings dipping. This equilibrium could keep the unemployment rate on an even keel and might even chill out wage hikes, which could, in turn, ease inflation in the service sector.
💡 Fed's New Recipe for Rate Cuts?
Jerome Powell, our main man at the Fed, has hinted that we might not need to wait for inflation to hit the magic number of 2.0% before they consider turning down the heat on interest rates. During his latest press conference, Powell mentioned, "you'd want to be reducing restriction on the economy well before 2% so you don't overshoot… it takes a while for policy to get into the economy, affect economic activity, and affect inflation."What does this mean for us? Well, it's like Powell is saying, "Let's not wait until the soup's cold before we turn off the stove." Even if inflation is lounging around 2.5% (the forecast for 2024), the Fed could start slicing those rates.
🍽️📊 The Numbers Game
With the fed funds rate currently simmering at 5.25% - 5.5%, and inflation showing signs of cooling off, real rates (which factor in inflation) are starting to feel a bit too spicy. It looks like the Fed is prepping for a gradual recipe adjustment, dialling back to a more neutral rate, maybe in the 2.5% - 3% range over time.
🚀 Market's Rally Recipe
The markets have been eating up the Fed's dovish vibes, continuing a rally in both stocks and bonds. The S&P 500 gobbled up over 2.0% last week post-Fed meeting, and it's up nearly 5% over the past month. We're also seeing a more diverse set of market leaders at the table, especially with investors getting a taste for the idea of lower rates next year.
Over the past month, the Magnificent 7 stocks, which have been the main course for most of the year, saw a modest rise of just 1.5%. Meanwhile, the Russell 2000 small-cap index, which had been more of a side dish in 2023, spiced things up with a nearly 11% jump. 🌶️
Dovish Pivot
It seems that the Federal Reserve's rate-hiking cycle has reached a turning point, with policymakers indicating the possibility of more rate cuts next year than previously anticipated. While the Fed maintained its key policy rate at 5.25%-5.50%, it left the door open for potential additional firming. This outlook was well-received by traders, as all three benchmark indices closed around 1.4% higher each, and yields saw a significant drop. Fed officials now project three rate cuts in 2024 and four in 2025, although Chair Jerome Powell cautioned that the Fed is still in the early stages of discussing policy easing. "Despite the message of caution, the Fed has clearly taken a dovish tone here," noted SA analyst Jeremy LaKosh. The European Central Bank and Bank of England also held rates steady, pushing back against talk of rate cuts. Even IMF chief Kristalina Georgieva warned against premature action in the battle against inflation.
Epic Win
The app store dominance of Google (GOOG) and Apple (AAPL) could be facing a challenge following a recent legal ruling that may compel them to open up their closed ecosystems. Epic Games, the maker of Fortnite, emerged victorious in its antitrust case against Google, as a jury found that the search giant's Play Store operated as an illegal monopoly. The jury determined that Google had monopolized the Android app distribution and payments market by imposing high fees on app developers and striking deals with rivals to stifle competition. The court will now consider whether Google should permit payment for and distribution of apps outside its app store. Epic's legal triumph poses a threat to the billions of dollars in revenue that Google generates from the Play Store. This win is particularly significant in light of Epic's previous loss against Apple in a similar case.
Autopilot Recall
Tesla (TSLA) issued a recall for over 2 million vehicles after the National Highway Traffic Safety Administration found that its Autopilot driver-assistance system does not sufficiently ensure driver engagement. The recall follows an NHTSA investigation into a series of crashes involving Autopilot. The agency will continue to monitor the effectiveness of Tesla's over-the-air software fixes as the investigation remains ongoing. Wedbush believes that Tesla's decision to implement the requested software update could pave the way for broader acceptance. However, Investing Group Leader Jonathan Weber cautioned that the indirect costs of the recall, such as potential brand damage, could be significant.
Top movers & shakers🎢
The stock prices of the following companies were influenced by various factors such as quarterly earnings, analyst ratings, and other news:
Boeing (BA) saw a 3.1% increase after UBS analyst Gavin Parsons raised the aerospace company's price target to $315, a 40% increase from his previous estimate, citing strong November deliveries.
Colgate-Palmolive (CL) rose 0.9% after Bank of America analyst Bryan Spillane upgraded the consumer products company from "neutral" to "buy" and raised his price target, anticipating stronger sales growth in the next two years.
Costco Wholesale (COST) experienced a 4.5% rise after posting stronger-than-expected quarterly results.
Darden Restaurants (DRI) fell 0.4% after the company, parent of the Olive Garden chain, posted mixed quarterly results.
Lennar (LEN) fell 3.6% despite surpassing analysts' expectations in its quarterly results.
Roku (ROKU) dropped nearly 7% after being downgraded by MoffettNathanson analyst Michael Nathanson from "neutral" to "sell," citing concerns about the stock being overvalued after a recent rally.
Scholastic (SCHL) tumbled nearly 12% after the publisher and distributor of children’s books reported a decline in year-over-year revenue and lowered its full-year earnings outlook.
Tractor Supply (TSCO) fell 3% after being downgraded by Bank of America analyst Jason Haas from "neutral" to "underperform" and a reduction in price target, citing expectations of demand and pricing headwinds pressuring profits.Looking ahead, next week's earnings calendar includes shipping giant
FedEx Corp (FDX), which is expected to report quarterly results on Tuesday. FedEx stock ended the week at its highest level since July 2021 and has gained 62% this year, reflecting investor expectations that the company's recent cost cuts will boost profit margins. FedEx is expected to have earned $4.14 per share in its previous quarter, up from $3.18 a year earlier, according to Nasdaq.
The week ahead: 18 Dec - 22 Dec 2023
Get ready for a jam-packed economic calendar next week!
We've got housing, manufacturing, and consumer sentiment releases coming in just before the Christmas holiday. Keep an eye out for the monthly update on core PCE (Personal Consumption Expenditures Index) - 22 Dec (Friday), the Federal Reserve's favoured inflation gauge. It's forecasted to show a 0.2% month-over-month rise in November, bringing the year-over-year rate down to +3.4%.
This would also imply a six-month annualized inflation rate just above 2.0%, hitting the Fed's inflation target. If the core PCE number aligns with expectations, the talk about lower interest rates may continue.In the world of trading, federal funds futures are indicating a 95% probability of the Fed's target rate being lower after the May FOMC meeting. And globally, the Bank of Japan meeting could bring some significant news on the end of the negative interest rate era for the nation.
Plus, keep an eye out for notable earnings reports from FedEx (FDX), Nike (NYSE:NKE), Carnival (CCL), and Micron Technology (NASDAQ:MU) in the U.S.
Earnings
Here's a quick look at the earnings spotlight for next week:
🔦 Monday, December 18 - HEICO (HEI)
🔦 Tuesday, December 19 - FedEx (FDX), Accenture (ACN), FactSet (FDS), and FuelCell Energy (FCEL)
🔦 Wednesday, December 20 - General Mills (GIS), Micron Technology (MU), Toro (TTC), and Winnebago (WGO)
🔦 Thursday, December 21 - CarMax (KMX), Paychex (PAYX), Carnival (CCL), and Nike (NKE)
Dividend watch
And don't forget to keep an eye on the dividend watch!
Companies projected to boost their quarterly dividend payouts include
ServisFirst Bancshares (NYSE:SFBS), WEC Energy (WEC), Fulton Financial (FULT), and FMC Corp. (FMC).
Events
As for events, the calendar is light ahead of the holiday break. The Bank of America Hydrogen Conference on December 18 & 19 will feature presentations by Plug Power (NASDAQ:PLUG) and CF Industries (NYSE:CF). Additionally, AutoZone (AZO) and Guidewire Software (GWRE) will hold their annual meetings on December 19 & 20.Stay tuned for an eventful week ahead! 📈✨
Sources:
https://seekingalpha.com/article/4658232-wall-street-breakfast-what-moved-markets
https://seekingalpha.com/article/4658313-wall-street-breakfast-week-ahead
https://www.edwardjones.com/us-en/market-news-insights/stock-market-news/stock-market-weekly-update
https://www.schwab.com/learn/story/schwab-market-update
*Disclaimer: This information is provided for general information purposes only. Consider your investment objectives, financial resources and other relevant circumstances carefully before investing. This is not an invitation or an offer to invest, nor is it financial advice or a recommendation to buy or sell any investment.
