Markets Trend Slightly Higher on Fed Relaxation Assumption

November was in general a marginally positive month for equities across the board with data releases suggesting that inflation levels may at last be peaking and signals that the Fed may be relaxing the pace of its interest rate impositions.  All the major U.S. stock indices moved higher, although not significantly so, with the Nasdaq gaining around 1% on the month, the Dow did better gaining over 3%, and the S&P 500 2%.

The major precious metals put on even more with gold up around 7% and silver over 11%, although both suffered quite severe setbacks on November 28, but saw recoveries the following day but gains were erratic with recoveries in Asian and European markets tending to be countered in North America.

The catalysts for the advances were the post meeting statements from Fed chair Jerome Powell, and various Fed officials, all suggesting that the long-awaited gradual reduction in interest rate impositions might commence as soon as the December FOMC meeting, which will take place on the 13 and 14 of the month.  However this policy has not been set in stone and, as is usual with Fed statements, is surrounded with caveats, and also has its detractors among some Fed notables.

Nonetheless the Chicago Mercantile Exchange’s Fedwatch Tool, which calculates the consensus view on the likely forthcoming Federal Funds rate increase to be imposed at the next FOMC meeting, is coming down strongly – around 65:35 – in favor of the slightly reduced 50 basis point increase, although that is well down from earlier readings.   This compares with the 75 basis point rises that have been imposed at the previous four such meetings.  Markets have been disturbed late in the month by unrest in China for fear that this may disrupt economic growth there and adversely affect commodity demand and prices.. 

Let it be said here, that at the beginning of the year, for a market which had become used to near zero interest rates, even a 50 basis point increase would have come as a shock and would likely have roiled markets.  Now the prospect comes as something of a relief and leads to an uplift.  Such is the change in sentiment!

Another factor which gave markets something of a boost was a positive Q3 GDP assessment in late October after two negative quarters which some had taken as showing that the US economy was in recession.  The Q3 figure was strongly positive, though, suggesting that the US economy grew by 2.6% over the period, although this figure was boosted by strong exports and weak imports, neither of which looked likely to be maintained given the strength of the dollar.  However preliminary figures for Q4 also appear to be positive according to the Atlanta Fed.

Mid-term elections were also not as predicted and did not see a wipe-out for the Democratic Party despite the apparent poor poll figures for President Biden.  It looks like former President Trump’s hold on the Republican Party may be fading, but much could change in the two years up until the next Presidential election.  However the degree of political instability which might have resulted from Republican Party control of both houses has not materialized which may have led, at least, to some additional degree of market stability.

Overall though there is still the distinct possibility, or even perhaps the probability, that the US economy is headed for recession next year, or even for an extended period beyond and the Fed’s interest rate policy going forwards could play a huge part in the depth and/or duration of this.  Whatever the Fed decides on interest rates at the December FOMC meeting these are going to end the year at a market-depressing 4.5% or higher.  Further there’s the distinct possibility they could reach 5% or more, if the hawks prevail, by mid-2023 before starting to come back down, and only reducing then if the Fed is happy inflation is on its way down too – which is no certainty.

That makes even most current equity prices vulnerable to possible falls – cryptos too.   Precious metals, on the other hand, may benefit, particularly if the dollar continues to weaken, although opinion is somewhat mixed on this.  Uncertain times for the investor thus continue.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.