U.S. stocks ended November on a high note as cooling inflation boosted hopes the Fed is done hiking.
December is expected to be another strong month as per recent history.
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November was a terrific month for the stock market - easily the strongest month of the year and the best month since mid-2022. The major averages rallied on growing expectations that the Federal Reserve is done with raising interest rates and could start cutting them next year.
The Nasdaq Composite was the top performer, surging 10.7% during the month, boosted by the ‘Magnificent 7’ group of mega-cap tech stocks. The tech-heavy index is now up 36% on the year, a big rebound from the 2022 slump.
Meanwhile, the benchmark S&P 500 and the blue-chip Dow Jones Industrial Average jumped 8.4% and 8.8%, respectively. That brings their year-to-date gains to 19% and 8.5% respectively.
The moves come as Treasury yields, whose steady rise over the last few months has weighed on stocks, slumped to multi-week lows.
The benchmark 10-year Treasury yield stood at 4.32% early Friday, compared to a 16-year high of just above 5% in mid-October, as investors largely believe the Fed has finished hiking rates and have started to price in a series of rate cuts beginning next spring.
As a cheerful November comes to an end, history says investors should expect further gains in December, which historically tends to be a strong month for the stock market. Since 1945, the benchmark S&P 500 index has averaged a gain of around 1.5% in December. That compares to an average gain of roughly 0.8% for the other months of the calendar.
With investors continuing to gauge the outlook for interest rates, inflation, and the economy, a lot will be on the line in the month ahead. The stock market rally faces its final obstacle of the year when the Federal Reserve delivers its latest policy decision on Wednesday, December 14.
While the U.S. central bank is all but certain to keep rates steady, the risk is that Fed Chair Jerome Powell could strike a more hawkish tone than markets currently anticipate and leave the door open to another rate hike as the economy holds up better than expected.
Many investors believe that the Fed is unlikely to raise rates any further, bringing an end to the central bank's most aggressive tightening cycle in decades. Meanwhile, financial markets are pricing in an almost 80% chance of a rate cut as early as the Fed's May 2024 meeting.
The Fed is at risk of committing a major policy error if it begins to loosen monetary conditions too soon, which could see inflationary pressures begin to pick up again. If anything, the Fed has more room to raise interest rates than to cut them, presuming it follows the numbers.
Indeed, U.S. government data released Thursday showed that the U.S. economy grew at a faster-than-expected 5.2% annual rate in the third quarter amid surprisingly robust consumer spending.