Inflation Cools & Stocks Warm Up

Week in Review

As we approach Thanksgiving this week, I am overwhelmed with gratitude for all of the wonderful clients I have had the pleasure to work with since launching my RIA two years ago. In that time, our business has grown from working with 40 families and managing around $40 million in assets to now working with 60 families and managing over $60 million in assets. I am so thankful for the opportunities I have had to help my clients reach their financial goals.

Our newsletter last week stated the market was set up for a small cap rally. Little did we know it would start right away. The Russell 2000 ended the week up close to 6%. Small Caps, now trade at a forward PE of about 10x, compared to the S&P 500 trading at a forward price to earnings closer to 20x. Meaning they still look cheap compared to the overall market.

The market now expects the central bank to lower interest rates by nearly 100 basis points in 2024. Regular readers of our blog will know that the rate cut expectations are the secret ingredient to bonds giving investors double digit returns in 2024 if it comes to fruition.

The market is implying that cost-cutting measures (layoffs) and productivity gains are likely to lead to higher profits for 2024. This quarter’s earnings reports have not revealed any major macroeconomic demand problems. Congress was also able to pass a stopgap funding measure with bipartisan support to avert a potential government shutdown.

The economic data is striking the right balance, not too hot nor too cold, allowing stocks to reach a two-month high and put the October correction behind them. Core CPI has fallen to its lowest reading in two years, indicating progress on inflation, and the labor market cooling off, giving the Fed the opportunity to step back and potentially cut rates as early as next year's second half.

This presents a great chance for equity-market laggards to catch up and for bonds to recover. Although a growth slowdown may create volatility, the fundamental drivers still look positive towards 2024.

Economic & Earnings Calendar

This week, Wall Street will get a Thanksgiving break, but not before Nvidia releases its earnings report Tuesday evening and the Federal Open Market Committee releases its latest meeting minutes. Options imply that Nvidia is priced to move over 7.5% when it reports.

On Monday, Agilent Technologies, Keysight Technologies, and Zoom Video Communications will report their quarterly results, followed by Nvidia, Analog Devices, Autodesk, Best Buy, HP Inc., Lowe's, and Medtronic on Tuesday. Deere will report results on Wednesday.

The FOMC will release its early November meeting minutes on Wednesday, and the Conference Board will release its Leading Economic Index for October on Monday. On Tuesday, the National Association of Realtors will report existing-home sales for October, and the Census Bureau will release the durable goods report for October on Wednesday. Lastly, S&P Global will release both its manufacturing and services purchasing managers’ indexes for November on Friday.

Nasdaq and New York Stock Exchange will close at 1 p.m. ET on Friday and the bond market will close at 2 p.m. ET. The Fed's policymaking group has held the federal-funds rate steady at 5.25%-5.50% since July, with traders pricing in less than a 1% chance that the Fed raises rates again before cutting them.

Chart of the Week: The cost of Thanksgiving in 2023 is being driven down by Turkey.

Disclaimer: The author of this blog is a financial advisor but may not be the right advisor for you. In fact, the author may not even be the right advisor for themselves. Please consult a qualified professional before making any financial decisions based on the content of this blog. And remember, just because the author has a fancy title and a briefcase full of spreadsheets, doesn't mean they know what they're doing.