Stock Market Wraps Up Big November
The stock market capped off a blowout November rally on Thursday, with the Dow Jones Industrial Average surging over 500 points to notch a new 2023 high. The S&P 500 and Nasdaq also posted their best monthly performances since July 2022. However, some Wall Street experts are advising investors to remain cautious as we head into December and 2024.
The Dow jumped 1.47% on Thursday to settle at 35,950.89, topping its previous peak for the year hit back in August. The blue chip index gained 8.8% in November, marking its strongest month since October 2022. The S&P 500 rose 0.4% on the day and surged 8.9% for the month. The tech-heavy Nasdaq dipped 0.2% on Thursday but still managed to climb 10.7% in November.
All three major averages are now solidly in the green for 2023. The Nasdaq leads the pack with a 35.9% year-to-date gain, recovering nicely after a brutal 2022. The S&P 500 sits up 19% for the year, while the Dow has added 8.5%.
What Drove the November Rally
November’s rally came amid growing optimism that the Federal Reserve may be able to engineer a soft landing for the economy. Investors welcomed data showing inflation pressures continuing to ease. This raised hopes that the Fed’s aggressive interest rate hikes are finally reining in surging prices without completely crushing economic growth.
“The November rally was fueled by hot inflation data showing signs of peaking along with hopes this would allow the Fed to be less aggressive,” said Edward Moya, senior market analyst at Oanda. “US stocks will have a tough time rallying if inflation proves sticky and pushes the Fed to remain aggressive with rate hikes.”
The Fed has lifted rates six consecutive times this year to their current range of 3.75% to 4%, the highest level since early 2008. Central bankers are aiming to cool demand enough to bring inflation down from over three-times their 2% target. Prices have shown some signs of moderating in recent months, with the consumer price index rising 7.7% in October from the year prior versus 8.2% in September.
The optimism in November came amid evidence inflation was cooling even faster than expected,” said David Donabedian, chief investment officer of CIBC Private Wealth Management. “Markets are betting this progress on inflation gives breathing room to the Fed and makes a soft landing more plausible.”
Cautious Outlook Ahead
While November’s epic rally sparked a renewed sense of optimism on Wall Street, some strategists are preaching caution heading into year-end and arguing more volatility lies ahead in 2023.
“Everyone’s really happy and it’s time for either a correction or some sort of pullback as we enter the new year,” said Chris Harvey, head of equity research at Wells Fargo.
Harvey warned on CNBC’s “Closing Bell” Thursday that the market looks “dramatically overbought” and that investors should rotate into more defensive sectors. While inflation readings have been encouraging, some economists say underlying price pressures remain too high for the Fed to declare victory just yet.
“Financial conditions have loosened perceptibly over the past two months, raising the risk that the Fed will have to do more macro policy tightening than the market currently anticipates,” said economists at Nomura in a note this week, adding they see rate cuts as unlikely until late 2023.
Though yields on the benchmark 10-year Treasury note have fallen from their November highs, rates remain well above year-ago levels at around 3.5%. Rising borrowing costs, along with high inflation, threaten to push the U.S. into a recession next year. Goldman Sachs, Bank of America and Deutsche Bank all say an economic downturn is their base case for 2023.
November brought the stock market roaring back from its September lows, capping off its best month since the summer rally. Stock Market Wraps Up Big November, But Cautious Outlook Ahead and ongoing rate hikes. Major indexes remain deep in the red for 2023 and more choppy trading is widely expected next year. For now, investors are happy to celebrate November’s big win but may want to temper their optimism about what lies ahead.
