Investment Update December 5, 2023

Last Week on Wall Street

Economic data for the week included Q3 Gross Domestic Product (U.S. economic production) being revised slightly higher, while Personal Consumption Expenditures (an inflation gauge) continued to decelerate. Manufacturing data remained contractionary on net, and new and pending home sales fell back.

Stocks gained globally as falling inflation and central banker comments led to hopes for lower interest rates next year. Bonds fared especially well, due to a drop in long-term rates leading to a strong duration effect. Commodities were mixed to down, with higher gold prices offset by weaker crude oil, despite OPEC+ production cuts.

U.S. stocks fared positively to end November. Positive sentiment was related to slower PCE inflation reading during the week, showing further deceleration in prices. More so, this was tied to some optimistic comments from Fed board member Waller, having updated his view of inflation ultimately getting back to 2% with current policy, and better chances of even ‘lowering the policy rate’ over the next 3-5 months. Markets jumped on the news, as this provided some hope for even more substantial rate cuts next year. However, before this exuberance got too out of hand, Chair Powell attempted to quash these dovish expectations, hinting at the still-possible chance of rate hikes ‘if’ data demands it. Seemingly now that probabilities are high that we’re at ‘peak’ Fed funds rate, the question of year-end has turned to rate cuts.

By sector, only communications lost ground, while cyclical materials, industrials, and financials led by gaining several percent. Real estate also gained nearly 5% on the hopes for lower interest rates, as one of the most rate-sensitive groups. U.S. small cap stocks fared especially well, with the Russell 2000 up over 3% as easing rates are expected to help that segment to an even greater degree than large cap.

Foreign stocks also fared positively with European consumer price inflation falling from 2.9% to 2.4%, a surprise on the downside, and core falling to 3.6%. Speaking of rate cuts, Europe has signaled that they’re further into the cycle than is the U.S., due to recessionary conditions. Expectations are for a faster timeline into easing—perhaps as early as Q1 or Q2 2024. Chinese stocks bucked the rest of the globe, by declining several percent as PMI data continued to contract; authorities also shared a 25-point plan to boost financial support in the private sector.

Bonds fared quite positively, up several percent, as the 10-year Treasury declined by a quarter-percent, with fading inflation fears. Investment-grade corporates fared best, with additional help from the credit spread, while floating rate bank loans were flat on the week. Foreign developed market debt performed similarly, while emerging market USD bonds outpaced local.

Commodities fell back generally, with declines in energy outweighing gains in precious metals, while industrial metals were little changed. Crude oil fell over a percent last week to $74/barrel, with price weakness over the past few months remaining focused on higher supplies running stronger than expected, as well as the removal of a geopolitical ‘risk premium’ in the Middle East. OPEC meetings last week (which had been postponed) were focused on two key issues: how they can share the burden of additional production cuts (by 2.2 mil. barrels/day early next year, albeit voluntary, leading to a muted price response) and a technical debate on 2024 output targets for West Africa. These appear to be niche issues, but all revolve around keeping supply manageable in order to sustain prices at a certain level with an uncertain global growth outlook.