Markets Cool After Last Week's Election-Fueled Rally
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Weekly Market Recap for November 15th
The stock market traded sideways after last week's election-driven gains. The S&P 500 finished with a slight loss, while the Russell 2000 dropped nearly -2% after last week's +8.6% surge. Factor performance was narrow, with Equal Weight, Growth, Value, Momentum, and Low Volatility all trading down less than -0.5%. High Beta stood out as the outlier, dropping by over -2%. Sector performance varied; Financials led, extending their post-election rally, and Energy rose by +1.9% despite a -5% drop in oil prices. Consumer Staples and Utilities rose nearly +1%, while Materials fell by more than -3.5% due to a broad selloff across industries. International stocks underperformed U.S. stocks as the dollar strengthened, with Emerging lagging behind Developed. In credit markets, bonds traded lower as Treasury yields rose. Duration remained a headwind, with long-duration bonds underperforming, while credit spreads remained stable.
S&P 500 Index (Last 12 Months)
S&P 500 Technical Composite (Last 24 Months)
Bullish and Bearish Narratives
Inflation Progress Slows as Seasonal Tailwinds Fade
Headline CPI rose by +0.2% in October, consistent with the past three months. Year-over-year, CPI increased +2.6% from last month's +2.4%. The rise matched market expectations, leaving investors largely unfazed. Still, inflationary pressures persist, particularly in core CPI, which climbed +0.3% for the third consecutive month. Over the past three months, core CPI has risen at a +3.6% annualized pace, the fastest since April. Comparing categories, Core Services inflation remains high compared to pre-pandemic levels, while Core Goods prices have returned to their pre-pandemic trend. These categories exclude vital goods and services like food, energy, and shelter, but they show how services are driving inflation. This week's PPI report also highlighted underlying inflation pressures. Headline PPI rose by +0.2% in October, in line with expectations but up from last month's +0.1%. Core PPI, excluding food, energy, and trade, rose by +0.3% m/m and +3.5% y/y, underscoring persistent price pressures at the producer level. The recent rise in inflation should not come as a surprise, as we previously highlighted inflation's seasonality in the 6/14 Market Update. We expect inflation to decline further, but the path will be bumpy, with inflation potentially stalling above the Fed's 2% target.
Inflation Rises as Seasonality Tailwind Fades
Core Services Inflation Remains Sticky
Fed Policy
Falling inflation has recently been key to policymakers' rationale for cutting interest rates. However, the past few months have yet to show much additional progress, and the election outcome has raised concerns about the impact of the Trump administration's tax and pro-growth policies on inflation. Here is how the market's rate cut forecast for the next two meetings has changed since the start of October. The probability of a -0.25% rate cut at the December meeting stands at around 75%, where it's been most of the past 1.5 months. However, the probability of another -0.25% rate cut at the January meeting has dropped to only 25% from about 70% at the start of October. The market currently expects only one rate cut between now and the end of January. Looking ahead to 2025, considerably more uncertainty exists. Multiple Fed officials highlighted the uncertainty in speeches this week, noting the challenge of determining the restrictiveness of interest rates. It is a topic we discussed in the 9/20 Market Update. Most Fed officials and investors believe inflation will continue to fall, but they are still determining how much more interest rates should be lowered. Our view remains unchanged: the market's forecast is now more reasonable but still seems high, given the state of the economy.
Update on Bank Lending Standards
The Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS) revealed a mixed lending environment in Q3. Most banks reported unchanged to tighter lending standards and weaker demand across various loan types, including C&I, residential, CRE, and auto and consumer loans. However, banks reported that credit card demand in Q3 was stronger than pre-pandemic levels across most credit score categories, with increased demand for new cards, higher credit limits, and greater use of existing credit. Overall, the survey highlights a trend of unchanged to tighter lending standards across most loan categories, with weakening demand for many types of loans. This suggests that banks are being cautious in their lending practices while at the same time facing reduced borrowing appetite from consumers and businesses. Our take: Loan growth has been relatively weak since the Fed started tightening. Weak loan growth hasn’t been a significant headwind yet, with wage growth and a rising stock market helping to drive economic growth. However, if loan growth remains sluggish, it could pose a headwind to economic growth.
Loan and Lease Growth Remains Sluggish
Labor Market Holds Steady Despite Challenges
Unemployment remained steady at 4.1% in October, with nonfarm payrolls increasing by +12,000. Health Care (+52,000) and Government (+40,000) continued to lead job gains, while Manufacturing (-46,000) lost jobs due to Boeing strikes and Professional & Business Services (-47,000) declined because of a drop in temp jobs. October’s hurricanes and strikes make it hard to gauge the labor market, but the overall trends remain consistent. The labor market is softening compared to recent years, as labor supply rises faster than demand. A large portion of the rise in unemployment earlier in the year was due to re-entrants, new entrants, and temporary layoffs rather than permanent job losses. While there are reasons to be cautious, the growing Not in Labor Force group suggests the risk of unemployment reaching 6% is decreasing. More retirements among those aged 55 and older are lowering the labor force participation rate, which we expect to keep the labor market tight. Our view is unchanged: the labor market is finding a new equilibrium rather than deteriorating.
Look Ahead
The past few weeks have been packed with market-moving events, but the calendar is expected to settle down as we approach year-end. Looking toward early 2025, we expect seasonality, strong market breadth, and mechanical buying as event-driven volatility subsides to support the market. While current valuations are high, history shows they are unreliable for timing the market—animal spirits can keep valuations elevated longer than fundamentals suggest. We remain cautious about early 2025 and underlying pressures, but there is little reason to battle the market or stay on the sidelines in the near term.
Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.
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