Ho Ho Ho

Equities rallied in the wake of the Federal Reserve’s policy announcement.  Treasury yields declined further last week.  In the Fed’s statement, Chair Powell’s press conference and the dot plot, the Fed is done raising rates, they’re not looking at a recession, the job market will remain firm through the forecast horizon, and inflation will continue to fall toward target setting up rate cuts (75 bps) next year.  Happy days are here!  Well, if an investor waited for this to invest, you’ve missed almost 1200 S&P 500 points up since the October 2022 low.

Seven tech megacaps—Microsoft, Apple, Alphabet, Nvidia, Tesla, Meta, and Amazon—have surged a combined 75% in 2023.  The other 493 companies in the S&P 500 have gained 12%. The Magnificent Seven account for nearly 30% of the entire index’s value, per the WSJ.   The S&P500 jumped +2.5% last week to within earshot (1.6%) of its all-time peak while extending its weekly winning streak to seven, and the NASDAQ stretched its year-to-date gain to 42%.

That said, the Fed will need to see further progress on inflation before they start cutting rates, which is one reason why we think they might not come quite as soon as the market now expects. But, market psychology has still been dealt a meaningful win—that is, there’s certainty now in knowing what the worst-case interest rate conditions are for this cycle. Indeed, the bond market has now quickly gone ahead and priced in almost a full 25 bp Federal Reserve rate cut by March 2024, with 150 bps of easing expected by the end of next year. This has now pulled 2-year Treasury yields down about 80 bps from the October high, and 10-year yields down about 110 bps since touching 5% around that same time. Suffice it to say that this marks a significant easing in financial conditions, and we’ll see if the Fed lets it run, or if they come out and start talking down these rate-cut odds.

The S&P 500 ended the week at 4,719 up from the prior Fridays close at 4,604.   All sectors gained for the week, led by real estate’s +5.3% surge as mortgage applications continued their upward trend, with 30-year fixed interest rates on conforming loan balances falling to their lowest level since July.  Materials jumped +4%, while communication services saw the only drop for the week, down 0.1%.

Industrials, consumer discretionary, and financials gained more than +3% each for the week. Technology advanced +2.5% despite a -9.1% plunge in Oracle (ORCL) and a -4.2% drop in Adobe (ADBE). Oracle’s fiscal Q2 revenue fell short of Wall Street’s expectations, while Adobe’s annual sales outlook missed market estimates.

Energy was up +2.4%. Global demand for oil is continuing to slow, the International Energy Agency said Thursday, a day after the Organization of the Petroleum Exporting Countries left its oil consumption forecasts unchanged.  Consumer staples rose +1.6%, while health care added +1.5% despite a -7.5% slump in Pfizer (PFE) as the drugmaker issued a downbeat full-year earnings outlook.

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