Soaring Like a Dove

Nov 6, 2023

By Jack Kraft, CFA
Print This Post Print This Post

U.S. equities rallied last week as investors flocked to buy up stocks in what many were calling an oversold environment following the S&P 500 hitting correction territory (10% below recent highs) on October 27. The broad theme after the sell-off was a risk-on sentiment, with stocks soaring higher amid a slew of catalysts, including perceived “dovish” comments from the U.S. Federal Reserve (Fed), corporate earnings and economic data. Each of the three major indices recorded five-day winning streaks last week—the S&P 500, Nasdaq and Dow surged 5.9%, 6.6% and 5.1%, respectively.

At the asset class level, U.S. Treasuries rallied as bond yields declined, with the 10-year Treasury note falling 30 basis points to around 4.5% over the five-day stretch. This is a sharp move down in the 10-year as the Treasury yielded as much as 5.0% on October 23. Meanwhile, WTI crude oil laid an egg on the week by being the worst performer, falling nearly 6.0%, as concerns faded over the spreading of conflict in the Middle East. Drilling down to the sector level, all 11 S&P 500 sectors were positive last week with both growth and value outperforming. Consumer Discretionary and Technology rallied roughly 7% each, while Real Estate and Financials both soared 8.5% and 7.4%, respectively.

The rally in stocks and bonds was partially attributed to the November Fed meeting, which was largely underwhelming at the surface. On November 1, the Fed kept rates at current levels—a decision that was widely expected by market participants. The main developments were from the press conference held by Fed Chairman Jerome Powell directly following the meeting. Powell’s overall tone was perceived as “dovish,” including remarks that policymakers are monitoring tighter financial conditions attributed to the higher interest rates and will be proceeding carefully.

What also provided a tailwind to this dovish narrative was weakening economic data that is supportive to a pause in the Fed’s hiking rates. The closely watched monthly jobs report showed slowing growth in the labor market last month, while a separate data point indicated that job openings declined as well. Additionally, consumer confidence saw its third straight monthly decline in October, as people continue to struggle with higher prices. Lastly, a data point that measures manufacturing activity in the U.S. logged its 12th straight month in contraction territory.

It was a busy week on the earnings front, with 32% of the S&P 500 constituents reporting quarterly profit results. Overall, the takeaway has been “better than anticipated,” as companies reported an average growth rate in profits of about 3.7% versus analyst expectations of a decline of 0.7%.

Switching gears, many will find this last part of the year to fly by as Thanksgiving approaches and Starbucks rolls out their newest over-hyped Christmas cups. But nonetheless, 2024 is approaching fast, and many don’t want to hear it, but so is the U.S. presidential election, which is actually less than 365 days away. But what does that mean for clients and financial markets?

One thing to keep in mind is that election years tend to be bumpier, with lower average returns and heightened volatility. According to Goldman Sachs, the S&P 500 posted average returns of 4% in the 12 months ahead of the last 10 elections. However, this number is skewed downward due to the last three recessions taking place during an election year: 2000, 2008 and 2020. If those years are excluded from the data, the average returns increase to about 9%. Another factor that Goldman Sachs points out is that during election years, valuations tend to move sideways, while returns are driven by profit growth. Given the elevated equity valuations on a price-to-earnings basis compared to history, this could ring true for next year as well.

As we look ahead to this coming week, investors will have no shortage of news with central bank speakers, economic data and earnings season. On Wednesday, all eyes will be on Fed Chairman Jerome Powell as he speaks at a conference. Economic data will be relatively light, with an update on consumer sentiment headlining the calendar Friday. Other notable economic updates include consumer credit, mortgage applications and a reading on the NFIB Small Business Index. In earnings, 55 of the S&P 500 companies will report profit tallies. Some of the more notable companies reporting this week include Materials – Air Products and Chemicals Inc. (APD), Energy – Occidental Petroleum Corp. (OXY), Devon Energy Corp. (DVN), Health Care – Biogen Inc. (BIIB), Vertex Pharmaceuticals Inc. (VRTX), Illumina (ILMN), Hologic (HOLX), Consumer Discretionary – eBay Inc. (EBAY), D.R. Horton Inc (DHI), Wynn Resorts (WYNN), MGM Resorts (MGM), Communication Services – Walt Disney (DIS), Warner Bros. Discover Inc. (WBD), Take-Two Interactive (TTWO).

U.S. Economic Calendar November 6-10

Monday, November 6
Time Country Release Name For Consensus Prior
No notable Economic Releases
Tuesday, November 7
Time Country Release Name For Consensus Prior
8:30 US Trade Balance Sep ($59.4B) ($58.3B)
8:55 US Redbook Chain Store 4-Nov
15:00 US Consumer Credit Sep +$10B ($15.6B)
16:30 US API Crude Inventories 3-Nov
Wednesday, November 8
Time Country Release Name For Consensus Prior
7:00 US MBA Mortgage Applications 3-Nov n/a -2.06%
10:30 US DOE Crude Inventories 3-Nov n/a +0.8M
Thursday, November 9
Time Country Release Name For Consensus Prior
6:00 US NFIB Small Business Index Oct n/a
8:30 US Initial Jobless Claims 4-Nov +218K +217K
8:30 US Continuing Claims 28-Oct +1820K +1818K
10:30 US EIA Natural Gas Inventories 3-Nov n/a +79B
Friday, November 10
Time Country Release Name For Consensus Prior
10:00 US Michigan Consumer Sentiment (Preliminary) Nov 64.3 63.8


Links to previously published commentaries can be found at Investment Insights/Weekly Market Commentary/Market