Here is the last paragraph from our newsletter last month: “Moving forward, LPL Research expects a strong job market, cooling inflation, the end of Fed (Federal Reserve) rate hikes, stable interest rates, and growing corporate profits to help stocks overcome these worries and keep this young bull market (a rising equity environment) going. And we believe the macroeconomic environment and seasonal tailwinds will provide enough support for stocks to move modestly higher over the balance of the year, though the path may be bumpy.”

For these exact reasons, the equity markets rallied significantly in the last month. So much so that the Dow 30 Industrial average rallied from the end of October 5,868 points through the month of November. An unprecedented rise! The cause was obvious; continuing improving inflation news and strong earnings reported by American businesses.

November was the strongest month on record since 1950. As interest rates began to edge comfortably lower, and as mutual funds finished their tax-loss harvesting trades, slowly but surely markets gained momentum in November, the most hospitable month for equities. On November 14, the softer than expected Consumer Price Index report ignited a strong bout of short covering in concert with options traders piling on, which created a squeeze and moved the S&P 500 above key levels. This “squeeze” phenomenon was a prime factor during 2021 when stock prices climbed quickly for “meme” stocks. Volume began to gain strength as the markets moved higher and the fear of missing out, the FOMO trade, caught fire. A solid Q3 earnings season, with margin expansion and more positive earnings revisions than expected, has pointedly offered constructive support for the markets.

Looking ahead, we will be dealing with new fears of course. One fear will be “are we headed for a recession?” and “will the Fed react quickly enough to soften the consequences?”. By reacting quickly enough, we mean will the Fed begin to lower rates at the correct timing to avoid recession and not let the economy slow too much. But this isn’t our worry today.

After the last few weeks of softening economic data, it increasingly looks like the July rate hike will be the last one for this cycle, and that could be good news for fixed income investors. Historically, once the Fed is done raising interest rates, we tend to see lower yields on intermediate-term securities even before the Fed cuts rates. Of the most recent Fed rate hiking campaigns, 10-year Treasury yields were lower, on average, by 1% a year after the Fed stopped raising rates. So, if history at least rhymes during this cycle and we do see lower yields over the next year, intermediate core bonds could very well outperform cash and other shorter maturity fixed income strategies. Historically, core bonds, as proxied by the Bloomberg Aggregate Bond Index, have performed well during Fed pauses. Since 1984, core bonds were able to generate average six-month and one-year returns of 8% and 13%, respectively, after the Fed stopped raising rates. Moreover, all periods generated positive returns over the six-month, one-year, and three-year horizons. We hoped you enjoyed getting some positive news. Call us if you have any investment questions or concerns.

-Mark and Elise

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All information is believed to be from reliable sources; however, LPL makes no representation as to its completeness or accuracy. This research material has been prepared by LPL Financial LLC. Tracking #513330-1  (Exp. 12/24).