The final week of trading in 2023 will begin today with the major equity averages on an eight-week winning streak. The latest stock market surge now has the Dow Jones Industrials, the technology heavy NASDAQ Composite, and the broader S&P 500 Index holding respective year-to-date gains of 13%, 43%, and 24%. The equity futures are indicating that some more buying is likely on tap when the abbreviated four-day stretch of trading kicks off stateside this morning.
That said, the final week of the year can often produce some volatile daily performances, as trading volume tends to be light with many market participants taking the holiday week off. The next four days will also bring some tax-loss selling before the calendar turns to the next year, which can often add to the intra-day volatility. Tax-loss harvesting is a strategy in which investors can sell investments at a loss to offset capital gains elsewhere.
Overall, this week will be very light on both economic and earnings reports. With this dearth of news, the market will likely spend the next few days trying to figure out how strong the just completed holiday shopping season was for the U.S. retailers. Judging by the recent better-than-expected readings on both consumer confidence and consumer sentiment, the forthcoming retailing reports are likely to show that the U.S. consumer continued to spend during the Christmas season. On Thursday, we will get initial jobless claims figures for the week ending December 23rd, and the latest international trade gap figures.
The recent bull run, which traces back to early November, has been fueled by the sharp drop in Treasury market yields. The falling Treasury security yields have been a reaction to data showing a continued easing in inflation and growing sentiment on Wall Street that the Federal Reserve is done raising interest rates. The latest encouraging news came from the Labor Department on Friday. The November personal income and spending report showed that personal income rose 0.4% last month, which was the best advance since August, while personal expenditures were flat versus the prior month. But what investors were most interested in was the Personal Consumption Expenditures (PCE) Price Index, which is the assessment of inflation most closely tracked by the Federal Reserve. Those figures showed a sustained decline in the pace of price growth. This had to be music to the ears of senior Federal Reserve officials who remain steadfast in the ongoing fight to reduce inflation and would like to accomplish this task without slowing growth to a point that would push the economy into a recession.
The November PCE Price Index declined 0.1% on a month-to-month basis, which marked the first decline since April 2020. Likewise the core PCE, which excludes the more-volatile food and energy components, also came in below consensus at +0.1%. On a 12-month basis, the PCE and core PCE were up 2.6% and 3.2%, both below Wall Street’s forecast and further evidence that inflation is moderating. This data raised sentiment that the Federal Reserve is done hiking interest rates and may well pivot on the monetary policy front at some point in 2024.
The aforementioned inflation data, as well as a number of other recent releases on the economy, most notably those from the labor market, have made for “goldilocks” reports. In a nutshell, the data have shown that the Fed’s actions are reducing inflation without significantly hurting the performance of the U.S. economy and raising concerns about a “hard landing” in 2024. On point, durable goods orders increased 5.4% in November, which was the best reading in more than three years.
The combination of falling inflation and solid economic data have been the perfect cocktail for equity investors, and that prompted the sharp pickup in buying during this year’s extended “Santa Claus”. Will the final four days of this year prove to be a continuation of this bullish trend? We would not bet against it, given the current backdrop of easing inflationary pressures and falling Treasury market yields. The rate on the 10-year Treasury note, which is used as a base for setting long-term lending rates, begins the week in the vicinity of 3.90%, more than a full percentage point below its 2023 high point reached in late October. – William G. Ferguson
At the time of this article’s writing, the author did not hold any positions in the companies mentioned.
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