Santa Claus Stock Market Rally?

Stocks broke a three-month losing streak in November, which may go down in history as being one of the best stock market months on record.  Both the Dow Jones and S&P 500 gained more than 9% while the NASDAQ Composite increased nearly 11%.  But even more impressive was the rally in bonds – the Bloomberg U.S. Aggregate Bond Index rose 4.5% for its biggest monthly gain in over 35 years!  
And no, that’s not a misprint …

So what happened?  And can this continue??

Unfortunately, there is seldom a simple answer as to why financial markets do what they do.  However, there is one factor we can point out that explains a lot - jobs.  The October payrolls report came out on Friday November 3rd and surprised investors with how much it had moderated.  Not only did new jobs added surprise to the downside, but the headline unemployment rate also ticked up (now at 3.9%).  Stocks and bonds staged a massive rally on that news and have basically gone up since.

Why was this such a game-changer?  Before I answer that, let’s look at the market environment leading up to that payroll report. During the third quarter, the Dow, S&P 500 and NASDAQ were all negative and by a significant margin.  Stocks peaked at the end of July and spent the next 90 days in turmoil.  The declines were accompanied by persistently lingering inflation worries and higher interest rates that resulted from those concerns.  Economists largely agreed that the source of these inflation issues was the continuously surprising strength of the labor market, with supply chain pressures having already faded away.

So getting confirmation of a moderating labor market on November 3rd was just the spark that investors needed, and good news became good news.  Interest rates fell (the yield on the 10-year U.S. Treasury saw its biggest monthly decline since December 2008), thus removing some competition for stocks from cash and money market funds.  In the meantime, corporate profits held up well in Q3, alleviating concerns of an “earnings recession” that so many investors had fretted about.  In fact, S&P 500 earnings grew year over year this reporting season, after having contracted during the three prior quarters.

With job openings still plentiful and a consumer still spending at a positive rate despite higher borrowing costs, the idea of a “soft landing” not only became a possibility but an accepted reality.  The growing list of economic doomsdayers were forced to consider the fact that we may actually have a scenario where inflation normalizes without a recession.  Imagine that – price pressures subsiding without millions of layoffs being necessary.

This is what has actually taken place thus far, and it’s the biggest story of 2023.  At least from an economic/market perspective.

Now for the big question – can this continue?  This Friday we’ll be getting the November jobs report, and it’s the last payroll report of the year.  It precedes the final CPI (inflation) reading on December 12th, and the last Fed interest rate decision on December 13th.  If the Fed does not move this month, it will be the third month in a row they stand pat.  If anything were to change their minds between now and the December 13th meeting, it’s this payrolls report.  Consensus is expecting 200,000 jobs added in November, which would be a gain from last month but would also have a lot of seasonal elements mixed in because of holiday-related hiring.  Assuming the number is close – above or below – is anyone selling stocks on that news?

So, in my opinion, the only unknown standing between us and a Santa Claus rally is a large upside hiring surprise in the November payrolls report, which we will have in our hands Friday morning.  Absent that, there’s no reason to expect that the recent rally should come to an abrupt end.  And quite frankly, we deserve it.  We’ve been through a lot and are coming off one of the worst years (2022) for stocks and bonds in quite some time.  So instead of joining the chorus of negativity amongst many investors and economists alike, we’re choosing to approach the end of 2023 full of holiday cheer!     

Thank you for your continued confidence and support.  As always, if you have any questions, we’re just a phone call or email away.

Brian Cayon, CFA, CPA
Partner & Investment Advisor
Fortress Planning Group