US Markets Rise in November on Soft Landing Hopes; The Fed's changing narratives urge caution

For all the bullish milestones marked by November's big market rise, recent history teaches Wall Street to be cautious.

Speculation continues to arise that the Federal Reserve is on the verge of easing monetary policy – prompting even cautious investors to erupt into a spasm of cross-asset buying. Stock prices are rising, bond yields are falling, and stock speculators are rushing into dark corners that include everything from meme flyers to crypto and profitless technology.

That's November in a nutshell. Volatility has fallen to pre-pandemic lows and a measure of Goldman Sachs Group Inc.'s global risk appetite is near its highest level in two years. But the events of June and July – marked by another all-out rally that resulted in a 10% correction – have ominous parallels.

Also Read: US Stock Market Ends Higher as Powell Raises Peak Interest Rate Hopes; S&P records the highest annual results

Could this time be different? Perhaps. While Fed Chairman Jerome Powell dismissed the prospects of rate cuts on Friday, the central bank's historic tightening campaign is seen as game-changing across markets. At the same time, risk exuberance is at odds with Powell's goal of tightening financial conditions, a back-and-forth dynamic that has contributed to the failure of previous rallies.

“The changing narratives have influenced markets much more than the fundamentals warrant — in both directions,” said Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors. “It’s a constant shift between oversold and overbought conditions.”

As always, extreme movements in markets raise warnings about their sustainability. Hedge fund manager Bill Ackman said on an episode of “The David Rubenstein Show: Peer-to-Peer Conversations” that economic optimism may be misplaced – unless the Fed starts easing much sooner than many investors expect. He referred to the effects of so-called real interest rates and pointed out that when inflation falls, they actually rise and threaten the economic cycle.

(Exciting news! Mint is now on WhatsApp channels. Subscribe today by clicking the link and stay updated with the latest financial insights! Click here!)

“I think there is a real risk of a hard landing if the Fed doesn't start cutting rates soon,” Ackman said, noting that he has seen signs of a weakening economy.

November's progress was tremendous in almost every way. Falling Treasury yields are setting the stage for strong rallies in stocks, credit and emerging markets. The Bloomberg 60/40 Index had one of its best months on record. Indices tracking crypto, meme stocks, IPOs and unprofitable technology – all of which struggled as yields soared – rose sharply. Cathie Wood's ARKK Innovation ETF (ticker symbol ARKK) gained a record 31%, its best month on record.

“The optimism that the Fed's next move will be a rate cut, the optimism that the U.S. economy will avoid a hard landing – they are powerful drivers and it was a huge turning point,” said Fiona Cincotta, senior financial markets analyst at City Index said on the phone. “Could we experience a hangover in January? Possibly if the Fed sticks to the narrative that it is higher for a longer period of time.”

The powerful rally comes at a sensitive time. While a range of data bolstered bulls this week – from jobless claims to gross domestic product to consumer confidence – it remains unclear whether the decline in inflation signals a more sustained economic slowdown. On Friday, the ISM manufacturing purchasing managers' index fell short of expectations, while the Federal Reserve Bank of Atlanta's GDPNow index estimate for U.S. fourth-quarter growth fell to 1.19%.

Also read: FIIs are celebrating a brilliant comeback! Make net buyers with a net inflow of in the last 6 sessions ₹13,474 crore; DIIs left behind

In addition to all the economic uncertainty, investors are also grappling with tricky market dynamics that were also evident over the summer, namely the outsized role of seven tech super stocks that drove the lion's share of the gains. Although there was a slight expansion in November, the top five contributors account for 68% of the index's returns this year, and the top 10 contributors generate 90% of the return.

According to JPMorgan Chase & Co., such tight leadership is typical ahead of a slowdown, where stock concentration has reached levels not seen since the 1970s.

“Equities are now highly valued, volatility is near historic lows, while geopolitical and political risks remain high. “We expect weak global earnings growth with downside moves for stocks from current levels,” JPMorgan strategists led by Dubravko Lakos-Bujas wrote.

Disclaimer: The views and recommendations expressed above are those of individual analysts or brokerage firms and not of Mint. We recommend investors consult certified experts before making an investment decision.

Milestone alert!Livemint tops the charts as the fastest growing news website in the world 🌏 Click here learn more.

Topics that might interest you