The Zig and Zag of Stocks and Bonds

Telemus Weekly Market Review November 13th - November 17th, 2023

Less than three weeks ago, stocks and bonds were bemoaning a ‘higher for longer’ expectation around interest rates. Stock prices had retreated just over 10% from their July 31st high, while yields on longer term Treasury bonds soared a full percentage point. Since the October 30th low, markets have very quickly reversed course as the S&P 500 has risen 8.5% and Treasury yields have retraced half of their ascent from the beginning of August. 

This past week markets received a jolt from a benign inflation report for the month of October. The Consumer Price Index (CPI) was flat month over month, resulting in the annual rate of inflation dropping from 3.7% to 3.2%. Markets cheered this data point as the S&P 500 concluded the week with a 2.2% gain, while bondsⁱ were up 1.4%. 

We came away from this week’s inflation report with a constructive view. Not only was CPI flat, but core CPI, which excludes more volatile food and energy items, decelerated to a 0.2% increase over the past month. This was a lower reading than we’ve seen in past months and showed it wasn’t just lower gasoline prices helping to ease inflation. Another positive economic reading came from unemployment claims that showed individuals without a job are more quickly returning to work. The combination of easing inflation and what remains a very favorable job market gives the Federal Reserve an easy excuse to continue pausing on interest rates. In fact, it looks increasingly likely that the Fed is indeed done with rate hikes. Based on its reaction this week, the market has begun to accept this as a fact and appears to have turned its attention to how quickly rate cuts might occur. We are less optimistic of the prospect for lower rates given the Fed’s focus on sustaining a lower level of inflation and not repeating the multiple inflationary episodes of the 1970’s. 

We continue to expect the pace of economic growth to decelerate. Consumer spending is likely to slow at some point, given that savings rates are at low levels, credit card balances are elevated, and higher interest rates continue to pressure those taking on new debt for home or auto purchases. A muddle along economic environment is our base case scenario over the next year. 

In such a slower growth scenario, we expect elevated volatility for bonds as investors zig and zag on expectations around the timing of federal reserve rate cuts. Our view is that there will be few if any rate cuts in 2024, and much of the volatility in rates will be noise. Treasury bond yields at present levels seem reasonable. Stock prices have shot higher and are now within shouting distance of 2023’s high. From a technical standpoint, stocks appear to be overbought. Corporate fundamentals have become more questionable as third quarter revenue growth was light, and many companies are indicating business conditions are softening. We wouldn’t be surprised to see stocks hold up into year end as this year’s gains may lead many to defer taking gains in their portfolios. What could transpire is a more volatile January as investors elect to reset portfolios and realize gains in the new tax year. 

On behalf of all of us at Telemus we’d like to wish all of you a Happy Thanksgiving. We are thankful for our clients and the relationships we have with you. We are grateful for the opportunity to help you enrich your life and provide you with financial life advice. 

ⁱAs measured by the Bloomberg U.S. Aggregate index

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