The November rally is built on the recognition that the Fed’s rate-hike cycle ended in July, the inflation rate should fall to the Fed’s 2% target next year, and policy to normalize to the neutral level. The deduction will begin. First half of next year. These are all the ingredients needed for a soft landing, which suggests the bull market will continue in 2024. Therefore, investors are starting to switch from defense to offense in wealth accumulation mode. So far, the rally has clearly been led by the most bearish investors, who have built up extremely painful short positions. This is why low-quality and small company stocks have gained the highest percentage. Yet this does not diminish the significance of the rally, as every major market reversal begins with a rush to cover shorts by bears who have given up.
Now that we have re-established a bullish trend in the market, my only concern is that the major market indices have moved in a vertical move in all but two of the last 13 trading days, which looks like panic buying. Is. We’ve had a lot of good news in a very short time, including the House passing a budget resolution that avoids a government shutdown. I think we need to digest the recent corrections, but it won’t be too painful, because what was resistance should now serve as support. For the S&P 500, that level should be 4,400 and not below the 50-day moving average of 4,336.
As far as the fundamentals behind this rally are concerned, we got a double dose of good news yesterday from the Producer Price Index (PPI) and retail sales for October. Producer prices fell 0.5% last month, relative to expectations for a 0.1% rise, the biggest monthly decline since April 2020. The core rate, which excludes food and energy, was unchanged relative to expectations for a 0.3% rise. That brought the headline number down to an annualized 1.3%, down from 2.1%, while the key rate fell to 2.4% from 2.7%. Producer prices lead up to consumer prices, so these declines should reinforce the deflationary trend going forward. The chart below also reinforces my long-held claim that inflation will fall just as quickly as it has risen.
As the chart below shows, with respect to the Fed’s 2% target, we are simply waiting for shelter costs. If we take this week’s core consumer price index data for October and remove shelter costs, rates are already just 1.3% below the Fed’s target. What we do know is that new rental rates and a decline in house price growth assure that shelter costs will fall significantly in the coming months, depending on the way the numbers are calculated, with huge gaps. Is performed. That’s why I’m confident we’ll reach the Fed’s goal much sooner than it anticipates. The stock and bond markets are now recognizing this.
Despite softening labor market conditions and the resumption of student loan payments, consumers held on hard to start the fourth quarter of the year. Retail sales declined just 0.1% last month, better than expectations for a 0.3% decline. This number was even more impressive considering that the previous two months had been revised higher. When we remove auto sales, which were hampered by higher borrowing costs, retail sales rose 0.1%. Sales of the control group, which excludes food services, autos, building materials and gasoline, rose 0.2%. This is the number that is used to calculate GDP, meaning we are off to a good start to the fourth quarter.
The bottom line is that these two reports present the soft landing narrative I have been promoting since the beginning of the year, as price pressures for producers and consumers ease while real growth in consumption sustains economic expansion. . The first correction in this relatively new bull market appears to be behind us. Now, I expect to see participation broadened during the next advance, during which the average stock begins to outperform. Bears have started calling for a “massive” market reversal by the end of the year, but the reversal has already happened. It is upward and not downward. Granted, we may see stocks pull back to resolve the short-term overbought situation, but this should be the case for the S&P 500 in the process of reaching new highs for the year.