If you’ve ever cornered a market forecaster and inquired about their outlook, you’ve likely encountered the phrase “Cautiously Optimistic.” Admittedly, we’ve used these words with investors, and I find myself ambivalent about them. As investors, we embrace risk, so a degree of caution is inherent. Yet, we willingly take risks because, historically, there has always been a rationale for optimism over time.
After the best month of the year for stocks and bonds, consensus is starting to go from doomsday forecasts to renewed optimism. It’s hard to believe those were posted just over a month apart, but its indicative of the whipsaw of sentiments we’ve seen. Investor emotions can swing dramatically in a short period, and things evolve swiftly. The American Association of Individual Investors (AAII) recently conducted a weekly survey gauging investors’ expectations for the stock market in the next six months.
A notable shift occurred within the past month, with the number of optimistic individuals doubling throughout November. While this might raise concerns for contrarian investors, the current month is December, historically known as one of the most favorable periods for investors. As we approach the end of 2023, maintaining a cautiously optimistic outlook for the road ahead seems justified.
Do We Want Rate Cuts?
The robust rally witnessed in November was partly attributed to Jerome Powell and the Federal Reserve signaling a potential halt in further rate hikes. However, they are currently not discussing rate cuts, as there’s concern it could fuel a fresh wave of inflation. While the idea of rate cuts might be appealing intuitively (except perhaps for those enjoying higher cash yields), we were curious to delve into how the market has historically performed after such rate-cutting events.
The chart displays the Overnight Federal Funds Rate in purple and the S&P 500 in orange since 1998, with three grey shaded areas indicating recessions during that period. Some astute bearish investors rightly assert that recessions often follow peaks in interest rates when rate-cutting begins. Rather than fearing rate cuts, it’s essential to understand the circumstances that lead to them. For instance, during the dotcom bubble in 2000-2002 and the Great Financial Crisis in 2008, the Fed responded by cutting rates. In the case of the COVID-19 pandemic in 2020, rates were swiftly dropped to 0 as lockdowns began.
While this chart may seem provocative, it’s crucial to note that historical rate cuts have been a response to economic weakening. If the Fed adopts a “higher for longer” approach, there’s a valid concern that the economy might falter, prompting rate cuts to stimulate growth. Conversely, if the Fed proactively cuts rates before signs of economic weakness emerge, we might avoid another recession, and the chart won’t need another grey shaded area. The future path the Fed chooses remains uncertain, and time will reveal their strategy.
Can Money Buy Happiness?
Empower recently conducted a poll to see if money can buy happiness. It turns out 6 in 10 American believe that it can, but the price tag isn’t cheap.
Millennials top the charts at a desired net worth of $1,699,571 and the average sit just below $1.2 million. The group surveyed 2,000 Americans adults between August 7 to August 14, 2023. While there have been many other studies showing that incremental wealth above a certain point has little impact on one’s happiness, it’s hard to say the results of the survey weren’t predictable nonetheless.
Articles We’re Reading
Pending home sales in October dropped to the lowest level since 2021 (CNBC)
Apple walking away from its Goldman partnership (Axios)
Fed’s Powell says it is premature to conclude that policy is sufficiently restrictive (CNBC)
Uber, Jabil and Builders FirstSource all tapped to join S&P 500 (Yahoo)
For the Month Ending 11/30/2023 (Cumulative Returns)1
1Source – Morningstar, Inc. Corporate Bonds is presented as the iShares iBoxx $ Investment Grade Corporate Bond ETF. Municipal Bonds is presented as the iShares National Municipal Bond ETF. High Yield Bonds is presented as the iShares iBoxx $ High Yield Corporate Bond ETF. 10 Year Treasury refers to the valuation of a 10 Year Treasury Note, a debt obligation issued by the U.S. Department of the Treasury. Fed Funds Target represents upper limit of the federal funds target range established by the Federal Open Market Committee. Inflation Rate provided for the purposes of this report by the U.S. Bureau of Labor Statistics. Unemployment Rate calculated by the U.S. Bureau of Labor Statistics. WTI Crude Oil refers to the price of a barrel of West Texas Intermediate NYMEX) Crude Oil. Gold – Spot Price relates to the valuation of an ounce of gold, as traded on the NYSE Arca Exchange. U.S. Dollar refers to the U.S. Dollar Index (DXY). All Returns are denominated in USD (United States Dollar), unless otherwise explicitly noted.
Did You Know?
I am sure you have heard (and enjoyed!) a “Santa Claus rally” in the stock market. This term refers to a historical tendency for stock prices to rise in the last weeks of December. The phrase is thought to have originated from the “Father Christmas Rally” mentioned by Barron’s in 1952.
While the exact reasons for this phenomenon are debated, some theories include the holiday spirit boosting optimism, tax planning strategies, lower trading volumes amplifying price movements, and institutional investors engaging in “window dressing” to improve year-end portfolio appearances. For whatever reason it occurs, here’s to hoping for one around the corner!
Presented by the Investment Committee of Lake Street, an SEC Registered Investment Adviser
The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful. Investing involves risk and you may incur a profit or a loss.