All Smiles As Stocks Enter December

The S&P 500 soared to a closing high for 2023 on Friday, extending November’s rally into the new month.

The broad market index rose by 0.59%, ending the session at 4,594.63. The tech-heavy Nasdaq Composite advanced 0.55% to 14,305.03. The Dow Jones Industrial Average added 294.61 points, or 0.82%, to close at 36,245.50.

The Dow rose to another new high on Friday, bringing its 2023 gain to nearly 9.4%, after it notched a new 2023 high and capped off its best month in more than a year.

The S&P 500 closed at its highest level since March 2022. Stocks bringing the broad market index to these heights include Ulta Beauty and Boston Properties, which rose 10.8% and 11.2%, respectively. Paramount popped 9.8%.

Federal Reserve Chair Jerome Powell on Friday pushed back against the market’s expectations for interest rate cuts ahead, saying it is “premature to conclude with confidence” that monetary policy is “sufficiently restrictive.”

Yields fell as equities rallied during the day, even after Powell’s cautious remarks as traders interpreted them as a signal that the central bank is at least done with hikes. The yield on the 10-year Treasury note fell more than 13 basis points to 4.213%.

“There’s a trifecta of drivers here. The first is the inflation. Second is the Fed seeming like it may be stepping to the sidelines, and then third is this cooling in the economy that is starting to unfold, but at a very gradual pace,” said Mona Mahajan, senior investment strategist at Edward Jones. “It’s almost like a Goldilocks cooling. It’s not too hot. It’s not too cold. And that’s exactly what markets are embracing.”

Mahajan added that markets seem to be pricing in rate cuts, but not until the back half of 2024.

November’s big rally was due in part to traders beginning to believe the Fed was done raising rates and that the central bank may even start cutting them in the first half of next year. The Fed next decides on rates on Dec. 13.

Friday’s moves come on the heels of a blowout November rally. November’s gains snapped a three-month losing streak. The S&P and Nasdaq rallied 8.9% and 10.7%, respectively, to notch their best monthly performances since July 2022. The Dow surged 8.8% for its best month since October 2022.

This week, the S&P 500 added 0.77%, while the Dow rallied 2.4%. The Nasdaq advanced 0.38%. It marked the fifth consecutive week of gains for the major averages.

This month is typically a strong one for equities, with Decembers that precede a presidential election generally delivering outsized returns.

“It’s a seasonally strong period,” said Bob Doll, chief investment officer at Crossmark Global Investments. “If the market still buys the notion that the Fed has solved the inflation problem and that they’re going to cut rates next year, but that the economy’s gonna be okay and earnings will be fine—and that’s the consensus line at the moment—then that’s good enough for stocks to go higher.”

Reuters also reports the S&P 500 rises to highest close of 2023 amid rate cut optimism:

The benchmark S&P 500 index closed at its highest level of the year on Friday amid growing optimism the Federal Reserve was done raising U.S. interest rates and could begin to cut them next year as inflation cools.

The index closed at 4,594.63 points, up 26.83 points, or 0.59%, and topping the close on July 31 at 4,588.96, which had been the prior high of 2023.

U.S. stocks rebounded in November following three straight months of declines on better-than-expected earnings and as evidence of easing inflation boosted bets that the Fed was at the end of its monetary tightening campaign.

On Friday the benchmark S&P 500 got another boost when Federal Reserve Chair Jerome Powell vowed to move "carefully" on interest rates, describing the risks of going too far with tightening as "more balanced" with risks of not controlling inflation.

"Markets view today’s comments as inching toward the dovish camp," said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina, in an email. "A few weeks ago, Powell said policy is restrictive but today, he believes policy is 'well into restrictive territory.' I think it’s fair for markets to latch on to that subtlety."

Bonds and stocks end the week on a high note after a blistering November and no doubt, Powell's remarks fueled rate cut expectations:

Here come the global rate cuts. ✂️

(via B of A / Hartnett) pic.twitter.com/sjP0AXGJrt

— Carl Quintanilla (@carlquintanilla) December 1, 2023

2-Year Treasury Yield has dropped below its 200D moving average for the first time since May 👀 pic.twitter.com/SPvCBE8Brp

— Barchart (@Barchart) November 30, 2023

JUST IN: Interest rate futures are now showing interest rate CUTS beginning in March 2024.

There's a growing chance of rate cuts beginning as soon as January 2024, at ~10%.

Just 3 weeks ago, markets saw a 50% chance of an additional rate hike and rate cuts beginning in June… pic.twitter.com/9lYazW9g2S

— The Kobeissi Letter (@KobeissiLetter) December 1, 2023

US Bonds were up 4.5% in November, their best month since 1985. pic.twitter.com/P2xbsG1eLw

— Charlie Bilello (@charliebilello) December 1, 2023

The US 60/40 Portfolio gained 7.3% in November, its 2nd best month in the past 30 years (trailing only April 2020) and 9th best since 1976. pic.twitter.com/zivJFiv7uw

— Charlie Bilello (@charliebilello) December 1, 2023

The S&P 500 gained 8.9% in November, the 18th biggest monthly advance since 1950. $SPXpic.twitter.com/QekjOfvMnX

— Charlie Bilello (@charliebilello) November 30, 2023

S&P 500 posted one of its strongest November gains on record pic.twitter.com/sMyr0JT3Ld

— Liz Ann Sonders (@LizAnnSonders) November 30, 2023

Moreover, there's plenty of cash on the sidelines to fuel stocks a lot higher and historically, December is even better than November:

A record $5.73 Trillion is sitting in money market funds and some of that will likely be reallocated to equities as rates come down says Janus Henderson Investors pic.twitter.com/irn2JMtKDL

— Barchart (@Barchart) December 1, 2023

Historically, December is better for $SPX returns than November (on average). There's also no evidence that a strong November pulls returns from December, it can happen, but autocorrelation is more likely. pic.twitter.com/fVUBvqYT6l

— RenMac: Renaissance Macro Research (@RenMacLLC) December 1, 2023

That's the good news. The bad news is the economy is definitely slowing and you see it in small businesses, the housing market and other areas:

Who cares how small businesses are doing if one can buy AI companies at modest 45 price / sales ratio pic.twitter.com/QCu5aCMwmv

— Michael A. Arouet (@MichaelAArouet) December 1, 2023

Business inventory is nearing contraction levels

The last 3 times happened during:

1. Dot Com bubble
2. Financial Crisis
3. Pandemic

Each one resulted in economic volatility pic.twitter.com/ChBcDrC53E

— Game of Trades (@GameofTrades_) December 1, 2023

The housing market has deteriorated rapidly

Buying conditions are at levels only seen 2 times since 1960

A thread 🧵 pic.twitter.com/rOlcRodkMc

— Game of Trades (@GameofTrades_) December 1, 2023

US housing affordability has fallen off a cliff

This is the most unaffordable housing market since 1989

Let that sink in pic.twitter.com/yQGMPIPUxU

— Game of Trades (@GameofTrades_) December 1, 2023

The housing market is rapidly weakening

Mortgage demand has plummeted

Reaching levels not seen in 25+ years pic.twitter.com/rf9R9hQACl

— Game of Trades (@GameofTrades_) November 29, 2023

I keep hearing that home prices won't really go down much this time around because of the lack of supply. I can't find much in macro data to support this notion. If anything, home prices are following trends in housing with the same fit and lead time as they have historically. pic.twitter.com/OHbHuoXO8B

— Francois Trahan (@FrancoisTrahan) November 21, 2023

The share of industries in the ISM saying they are now expanding is all the way down to a grand total of 17%. The chart says we’ll be drawing a fresh shaded region before long. pic.twitter.com/sEbMxSiuR4

— David Rosenberg (@EconguyRosie) December 1, 2023

Still, people refuse to believe the economy is slowing or that we are entering a recession, misunderstanding the macro data:

Well, this might explain what is happening with my inbox! The chart below shows the word count on Google for the term "soft landing", which is through the roof, and "recession", which is closing in on ZERO at this point. pic.twitter.com/VeHJMbHOjr

— Francois Trahan (@FrancoisTrahan) November 29, 2023

Friendly Reminder: It's normal for the economy to be doing well at the end of a Fed tightening cycle. In fact, real GDP growth has averaged 3.7% at the end of the last five tightening cycles. The economy grew slightly slower than that in Q3, but still in the right ballpark. pic.twitter.com/mUs8PBa5So

— Francois Trahan (@FrancoisTrahan) November 29, 2023

In my humble opinion, the US economy has just entered a recession and while this is typically good news for bonds, not so much for stocks because earnings will get hit.

And the tricky thing with bonds is to gauge whether inflation expectations will continue to decline or will they remain elevated and will inflation surge again if wage inflation picks up in the second half of next year.

In other words, are the risks of stagflation elevated or are we headed into a deleveraging/  deflation environment?

Nobody can forecast these things with accuracy, the only thing I can guarantee you is if something breaks in the markets in Q1 or Q2 2024, the Fed will panic and start cutting rates by chunks of 100 basis points.

And what will lead the Fed to panic and start cutting rates drastically?

My money is on a good old fashion banking crisis as unrealized losses soar, and apparently hedge funds agree with me:

BREAKING: Unrealized losses on investment securities held by US banks hit $684 billion in Q3, according to the FDIC.

This marks a 22.5% jump compared to unrealized losses seen last year.

The jump was primarily driven by rising mortgages rates reducing the value of… pic.twitter.com/plhegxDLtJ

— The Kobeissi Letter (@KobeissiLetter) November 29, 2023

Hedge Funds are the least long financial stocks since the onset of covid pic.twitter.com/2uKrfHzmoI

— Barchart (@Barchart) November 30, 2023

We shall see, for now sentiment is bullish and bears are hibernating:

Bears are hibernating … rolling 4-week change in % of bears in @AAIISentiment survey has plunged into negative territory … largest drop since April 2009 pic.twitter.com/P27QOcrMK5

— Liz Ann Sonders (@LizAnnSonders) December 1, 2023

% of @AAIISentiment bears has fallen to lowest since January 2018 pic.twitter.com/luhfktPrMT

— Liz Ann Sonders (@LizAnnSonders) December 1, 2023

Will FOMO and good holiday spirit propel stocks even higher?

Maybe, sure looks that way, but some bears remain skeptical:

The chart of the week: pic.twitter.com/UZzjxG74H5

— Mac10 (@SuburbanDrone) December 1, 2023

Don't worry, central banks are already preparing for the next crisis/ global recession:

All major central banks in next recession

pic.twitter.com/rEBppcrCK7

— Michael A. Arouet (@MichaelAArouet) December 1, 2023

But if I were you, sweep the table often and don't walk on ice unless you can skillfully avoid disaster:

The way this lynx decides to jump across once it hears the ice cracking.. pic.twitter.com/N1B1784RRn

— Buitengebieden (@buitengebieden) December 1, 2023

Alright, let me wrap it up there, it's been a long week and time to relax and enjoy the weekend.

Below, Ian Shepherdson, Pantheon Macroeconomics chief economist, joins 'Squawk Box' to discuss the Fed's inflation fight, rate path outlook, latest market trends, and more.

Second, Yung-Yu Ma, BMO Wealth Management CIO, joins 'Squawk on the Street' to discuss Ma's first take on the recent comments from Jerome Powell, why Ma believes equity markets are too optimistic about rate cuts, and much more.

Lastly, this week we lost a legend in the investment world. CNBC's Becky Quick looks back at the life and legacy of long-time Warren Buffett business partner and investing legend Charlie Munger following news of his death at 99. 

It is worth remembering Charlie Munger's top ten quotes:

1. "Spend each day trying to be a little wiser than you were when you woke up."

2. "The best thing a human being can do is to help another human being know more."

3. "It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent."

4. "In my whole life, I have known no wise people who didn't read all the time — none, zero."

5. "I never allow myself to have an opinion on anything that I don't know the other side's argument better than they do."

6. "The big money is not in the buying and selling, but in the waiting."

7. "You don't have to be brilliant, only a little bit wiser than the other guys, on average, for a long, long time."

8. "The first rule is that you can't really know anything if you just remember isolated facts and try and bang 'em back."

9. "There are worse situations than drowning in cash and sitting, sitting, sitting."

10. "The game of life is the game of everlasting learning. At least it is if you want to win."

RIP Mr. Munger, may future generations always learn from your wisdom on life and markets.