On Nov. 9, Federal Reserve Chairman Jerome Powell issued a warning to traders and financial markets: Don't assume rates will be flat to lower for the foreseeable future.
The computers that drive financial markets saw his remarks as a threat to rising markets and sold off.
A day later, however, traders, investors and all their computers reconsidered. Now, they saw bullishness broadly everywhere, and markets enthusiastically recovered.
The reasonable conclusion would be that a rally that erupted at the very end of October still can evolve into a classic holiday rally that goes well into December. December is historically either the top performing month of the year or second-best.
All of the major averages moved higher on Nov. 10, especially chip and tech stocks. Interest rates moved lower. So, too, did oil prices and gasoline prices.
The Nasdaq Composite Index ^COMPX and the tech-dominated Nasdaq-100 Index ^NDX are already up more than 7% so far in November.
A caveat must be offered. The bullishness must be tempered by this wildcard; the ongoing battle in Washington over federal spending and who really holds the power.
Related: Mortgage rates witness biggest drop in a year
Without some sort of resolution to appropriate the money keep all the agencies of government open, large swaths of its day-to-day operations could halt at midnight on Nov. 17.
Over the weekend, House Speaker Mike Johnson proposed a bill that would extend funding for some agencies through late January, and for others until early February. And, The New York Times noted, it omits funding for Ukraine or Israel. A House vote could come as early as Tuesday. It's not clear if it could survive a Senate vote or a White House veto.
A government shutdown would disrupt all manner of activities across the United States and even the world. There's a good chance an unwelcome slap of volatility will erupt starting on Monday.
The shutdown worries come after the Nov. 10 announcement from rating agency Moody's that it has changed the outlook on the U.S. government's credit rating from stable to negative.
The announcement is not a credit downgrade, but it could lead to one. The warning could push interest rates higher and validate Fed Chairman Powell's warning. Fitch Ratings downgraded U.S. debt from AAA to AA+ in August.
Earnings reports coming from Home Depot, Walmart, Target
All of that will be the backdrop to a week that sees earnings reports from Home Depot HD, Cisco Systems CSCO, Walmart WMT, Target TGT, Applied Materials AMAT and Ross Stores ROST.
Plus there are important economic reports coming such as U.S. retail sales and the Consumer Price Index on Nov. 1, the Producer Price Index on Nov. 15 and housing starts and building permits report on Nov. 17.
The week that ended on Nov. 10 saw the Dow Jones Industrial Average DJI rise 0.7% on the week, with the Standard & Poor's 500 Index ^IN moving up 1.3%. The Nasdaq Composite Index ^COMPX add 2.4%. The tech-heavy Nasdaq-100 Index ^NDX jumped nearly 2.9%.
The Dow is up 3.7% on the month and 3.4% for 2023. The S&P 500 has gained 5.3% in seven trading days in November and is up 15% year-to-date. And it produced its best two-week performance of the year.
The Nasdaq is up 7.4% on the month and nearly 32% on the year. The Nasdaq-100 has soared 42%.
Crude oil, meanwhile, slumped 4.2% on the week to $77.17 while the national retail price of gasoline dropped $3.39 a gallon, down 1.4% on the week and down 12.7% from the 2023 peak price of $3.881 on Sept. 18.
Yes, this snapshot offers a rosy snapshot of the economy, but risks remain, starting with the shutdown threat.
Looking at all the risks
Then, there is the ongoing debate over whether stock prices are too high. Jacob Sonenstein at Barron's argues stock prices are still too high, with the S&P 500 selling at 18 times earnings. And much of that multiple is the result of low interest rates until early 2022.
It is also true that the gains for the S&P 500, the Nasdaq and the Nasdaq-100 in the last year are the result of huge gains in a limited number of stocks. Nvidia, Microsoft (which hit new 52-week highs this past week), Apple and Google-parent Alphabet GOOGL and Facebook parent Meta Platforms META.
There was hope that last week that big gains among smaller stocks and indexes were a healthy development. Alas, the market this week was all about big stocks.
And Factset sees that trend continuing after a fourth-quarter dip. While earnings overall will expand in the first quarter of 2024, the market-research firm thinks the key drivers will be Nvidia, Amazon.com AMZN, Meta and Alphabet.
Take them out, and earnings will slip to 3.2% from the company's 6.7% year-over-year gain, senior earnings analyst John Butters wrote this past week.
Goldman Sachs Chief Economist Jan Hatzius, meanwhile, thinks the surprise of 2023 has been the resilience of so many economies, especially the U.S. economy, despite the Fed moving its key interest rate from nearly 0% up to 5.5%-to-5.75%.
The investment house also believes the U.S. and global economies will be better off if rates are not at zero but at levels that predominated before the 2008-2009 financial crisis. And he doesn't believe the Fed will be cutting interest rates in the next year unless something bad happens.
Something bad could include:
- The continuing violence in both the Middle East and between Ukraine and Russia and the threat the fighting will expand.
- Weakness in the domestic housing market because of limited supply, high prices and affordability issues and high mortgage rates.
- Pressures in the banking system with many mid-sized banks over-invested in office real estate loans. The issue: Office vacancies are probably at their highest levels since the early 1980s.
- Stresses in automobile markets. Electric vehicles, which many enthusiasts see as a crucial element in moderating climate change, aren't selling as well as many manufacturers want.
- Many consumers are stressed by the struggles of coping with the inflation that erupted as the Covid-19 virus eased.
- Tensions between the United States and China.
