US stocks and bonds surged on Friday, with Wall Street ignoring Federal Reserve Chairman Powell’s attempts to curb market expectations of interest rate cuts and instead becoming more convinced that the Fed will maintain rates this month and cut them in 2024. Given the “distinct seasons” of US stocks this year, it seems likely that we can expect a Christmas rally in the second half of this month.
The Dow Jones Industrial Average rose 294 points on Friday, up 2.4% for the week, marking its longest weekly gain since the end of 2021. The S&P 500 Index rose 0.8% on Friday, reaching its highest level since March 2022. The tech-heavy Nasdaq Composite Index also rose by 0.4%. TSMC ADR rose by 1.3% on Friday, following a rise of 0.4% in the Philadelphia Semiconductor Index.
Powell stated on Friday that if necessary, the Fed is still prepared to raise interest rates but also indicated that policy has already entered a “restrictive zone,” strongly suggesting that rate hikes are complete. Despite Powell’s reserved language, investors who anticipate rate cuts next year feel more reassured as bets increase not only for a 25 basis point cut in March but also for over a hundred basis points cut by December next year.
The yield on sensitive US two-year Treasury bonds fell sharply by thirteen basis points to reach at an all-time low since Silicon Valley Bank collapsed in March this year at around four-point fifty-five percent (4.55%). The ten-year bond yield dropped eleven basis points to reach four-point twenty-one percent (4.21%).
Quincy Krosby, Chief Global Strategist at LPL Financial said that markets firmly believe that the Fed has turned dovish in November and will start cutting rates even earlier than mid-2024; thus loosening their stance about maintaining higher rates for longer periods.
The rise in US stocks not only reflects market expectations that the Fed is likely to end rate hikes but also the low-key contribution of corporate earnings behind the 8.9% surge in November.
As the third-quarter earnings season just ended, S&P 500 index constituents’ net profit for Q3 grew by 4.1% compared to the same period last year, ending three consecutive quarters of decline. Analysts now estimate an average growth of over 11% per share for S&P 500 index companies next year, which is much more impressive than their lackluster performance so far this year.
US stocks have shown distinct trends in each quarter during the second half of this year: a nearly five percent drop in September, known for being historically poor; intense volatility in October; and a nearly nine percent surge in November, which was historically strong. Investors are now expecting a typical Christmas rally to occur this month as well.
According to CFRA statistics, December is historically the second-best performing month for the S&P 500 Index with an average increase of 1.54% since 1945; it also has the highest probability of rising with a rate of seventy-seven percent (77%).
LPL Financial Research has also found that performance tends to be better in the second half of December compared to the first half since 1950 when it comes to what’s called “Christmas rally,” with an average increase of around one-point-four percent (1.4%) versus only zero-point-one percent (0.1%) on average during early December.
Investors will focus on Friday’s release of US employment data next week to assess whether US economic growth remains steady.