Stock Market Update

Gayle Sprute

Vice President
Senior Portfolio Manager

Stocks drifted modestly higher at the beginning of this week, as investors waited for some key data and events: updates on inflation and communication from the Federal Reserve (Fed) at the conclusion of its last policy meeting of the year.

On Tuesday, November’s Consumer Price Index (CPI) came in mostly in line with expectations. The report showed that headline CPI rose 0.1% month/month, while the core reading rose by 0.3%. On an annualized basis, headline inflation edged down to 3.1%, aided by the 6% decline in gasoline prices during the month. Annualized core inflation was more stubborn, remaining unchanged at 4%. Market reaction to the data was muted this month. Recall that last month’s cooler than expected October CPI report fueled a sharp rally and a surge in economic soft landing expectations.

Wednesday morning brought the November Producer Price Index (PPI) data, which showed that headline PPI was unchanged month/month and core was up just 0.1%. Annualized, headline PPI declined to 0.8%, while the core reading declined to 2.5%. As with CPI, declining energy costs aided PPI during November. Both the CPI and PPI reports added support to the disinflation narrative and set the stage for the Fed’s news.

The big event came late Wednesday morning. Upon conclusion of its Federal Open Market Committee (FOMC) policy meeting, the Fed held interest rates steady, as expected. The focal points for investors, however, were the updates to its Summary of Economic Projections (SEP), any nuance changes in the statement, and commentary from Fed Chair Powell: 

SEP Updates. The committee’s “dot plot” showed a median projection for 75 basis points of easing in 2024 (up from the projection in September), suggesting the possibility of three rate cuts next year. It also indicated members see inflation peaking at 2.4% next year, lower than the September projection of 2.6%.

2) Policy Statement. The statement was viewed as leaning slightly more dovish. Tweaks included acknowledgement that inflation has eased and that the Fed will watch data to determine the extent of "any" additional policy firming.

3) Fed Chair Powell Press Conference. Powell noted that “nobody is declaring victory” and that it is “premature.” But he made it clear that starting to dial back policy restraints was a “topic of discussion” at this week’s meeting and that “this will be a topic for us looking ahead,”

Between changes in the SEP projections and Chair Powell’s comments, the equities market interpreted that the Fed is done raising rates and the next move will be lower in 2024. In reaction, the domestic equity indices staged a spectacular rally on Wednesday afternoon. The Dow Jones Industrial Average closed at a new all-time high and the S&P 500’s rally brought it to within 2% of its record high, which was at the beginning of 2022. The Russell 2000 (small cap stocks) had the biggest gain, up 3.5% on the day, and fit with the theme of broadening market strength over the past couple of months. Finally, rate-sensitive sectors like utilities and REITs were some of the day’s best performers.

The dovish Fed pivot fueled a big week of gains for US equities. As the chart below shows, small caps were the standout. This week marks the seventh consecutive week of positive performance for the S&P 500, something that has happened only ten other times since 1990 (last time in 2017).

Next week’s coming attraction will be the release of the Personal Consumption Expenditures (PCE) index, the Fed’s favored inflation measure. Given this week’s news, the PCE data will be even more important to watch.  

  Updates to the Equities Buy List: