Investors had a lot to be thankful for during this Thanksgiving holiday. The U.S. stock market continued its strong post-election rally, with the Dow Jones Industrial Average and the S&P 500 Index closing at all-time highs and registering their best monthly gains of the year. The Dow closed at 44,910, up 7.5% during November alone (Source: CNBC).
Interest rate expectations
One reason for the strong performance of U.S. equities is the belief that the Federal Reserve will continue to reduce interest rates over the next 12 months to recalibrate monetary policy. The central bank is expected to cut interest rates at the Federal Open Markets Committee meeting on Dec. 18 despite inflation readings that still remained above the 2% target. The Fed’s preferred inflation measure, the Personal Consumption Expenditures report, or PCE, is up 2.3% for the year, according to the latest report issued on Nov. 27. The core PCE, which excludes volatile food and energy costs, was slightly higher, at up 2.8% for the year. The overall downward trend, however, apparently gives Federal Reserve officials the confidence they need to continue to gradually ease monetary policy.
The old adage “do not fight the Fed” seems to reassure bond investors that interest rates can continue to come down. Indeed, 10 Year Treasury Yield was lower by 22 basis points on the week (Source: Barron’s) despite strong rhetoric from the upcoming administration on imposing tariffs on the three main trading partners of the United States: China, Mexico and Canada. The fear of renewed inflation generated by tariffs on imported goods had largely been responsible for rising Treasury bond yields since the election.
Investor confidence grows
With interest rates coming down, U.S. corporations delivering strong earnings that are projected to grow nearly 15% in 2025, and emerging signs of potential resolutions to the conflicts in Ukraine and the Middle East, the enthusiasm for the U.S. equity markets is understandable. However, we remind investors that periods of high bullishness among financial market participants have historically been followed by subpar performance. After all, when everybody has bought into the market, who will be the next buyer to drive the stock market to new records?
According to The Conference Board some 56% of consumers expect equities to be higher in the coming year, this is the highest percentage in many years. While we do not recommend exiting the stock market altogether, it might be an appropriate time for investors to selectively trim some of the more risky investments in their portfolios.
Another strong jobs report?
This week financial market participants return for the final stretch of the trading year. All eyes will be on the unemployment report scheduled for release on Friday, Dec. 6. Expectations are for the creation of 200,000 non-farm payroll jobs and a steady unemployment rate of 4.1%, according to the Wall Street Journal. Should this forecast be realized, it would confirm a solid U.S. economic picture, which remains the envy of many other countries.