Evening Brief – 11.06.23
Optimism for Risk Assets
The Federal Reserve’s dovish stance last week, along with weaker-than-expected October nonfarm payrolls, has boosted equity market bulls. But does last week’s rally mark the end of the correction?
The equity rally has been spectacular, with all but one major asset class participating (commodities were weaker). Property stocks led the way, with the Vanguard US Real Estate ETF up 8.9% last week.
According to one analyst, the recent market slump is over. Larry Adam, CIO of Raymond James’ private client group, told Dow Jones Newswires that current market conditions represent a buying opportunity.
“Yes, supply/demand dynamics have been driving interest rates lately, but the macro drivers of softer economic growth and continued disinflation should drive interest rates significantly lower over the coming months,” Adam explains.
Uber-bear Morgan Stanley strategist Mike Wilson, on the other hand, has a cautious stance and advises investors not to overreact to the recent drop in U.S. Treasury yields.
“The drop in Treasury yields was more related to the lower-than-expected coupon issuance guidance and weaker economic data as opposed to the bullish interpretation (for equities) that the Fed is going to cut rates earlier next year,” said Wilson.
However, keep in mind the broader market trend. The S&P 500 Index’s 5.9% weekly rise, for example, is insufficient to reverse a negative bias that has prevailed since August. If this is a concerted shift in sentiment, prices will stabilize, if not rise, in the next days and weeks.
At the same time, GDP predictions indicate that economic growth will decrease after a blistering 4.9% increase in the third quarter. The Atlanta Fed’s GDPNow model now predicts that output will fall dramatically to 1.2%.
To the degree that bullish expectations gain support from lower economic growth and additional signs that rate hikes are over, the week ahead looks promising for equity bulls.
It’s too soon to declare that this is enough to halt the broader correction in the stock and bond markets, but the case for optimism this week is even better than last week.