Monthly Market Insights | December 2023

U.S. Markets

Stock prices surged last month as positive inflation data and falling bond yields emboldened investors.

The Dow Jones Industrial Average gained 8.77 percent, while the Standard & Poor’s 500 Index advanced 8.92 percent. The Nasdaq Composite, which has led all year, picked up 10.70 percent.1

How far that little candle throws his beams! So shines a good deed in a weary world. William Shakespeare’s “The Merchant of Venice” Act 5, Scene 1, spoken by Portia

Inflation Eases, Bond Yields Fall

The fears that have dragged on the stock market since August evaporated in November, as fresh inflation data reaffirmed continuing progress in the fight against rising prices.

The good news on the inflation front, coupled with upbeat comments by Fed officials, helped drive bond yields lower. Additionally, the bond market was relieved following news that a 20-year Treasury Note auction was well received.

CPI Report Sparks Rally

When October’s Consumer Price Index (CPI) report was released mid-month, showing prices flat from the previous month and a cooler-than-forecasted core CPI (excludes food and energy), stocks surged, with the S&P 500 index rising 2.9 percent. The yield on the 10-year Treasury dropped 19 basis points—a huge one-day move.2

Rate-Hike Cycle Ending?

The combination of decelerating inflation, constructive economic data, and generally benign commentary from Fed officials over the course of the month generated an increasingly optimistic outlook that the Fed’s rate-hike cycle may be at its end, and the prospect of a rate cut sometime in the first half of 2024.

Solid Corporate Reports But Cautious Outlooks

Corporate earnings were also a key focal point in last month’s stock market actions. With 94 percent of S&P 500 companies reporting, 82 percent reported a positive earnings surprise, while 62 percent reported a positive revenue surprise. On a more cautionary note, 64 S&P 500 companies issued negative earnings guidance for the fourth quarter, while 32 issued positive guidance.3

With powerful gains already registered for the month, investors took a breather in the final week of trading to digest November’s exceptional gains.

Sector Scorecard

For the month, all industry sectors, except Energy (–0.72 percent), ended higher, including Communications Services (+7.80 percent), Consumer Discretionary (+10.97 percent), Consumer Staples (+4.13 percent), Financials (+10.94 percent) Health Care (+5.4 percent), Industrials (+8.83 percent), Materials (+8.35 percent), Real Estate (+12.48 percent), Technology (+12.90 percent), and Utilities (+5.14 percent).4

What Investors May Be Talking About in December

Investors’ attention is expected to shift to the two-day Federal Open Market Committee (FOMC) meeting, which ends on December 13.

The focus may be less on the actual rate decision—since the markets expect the Fed to maintain the federal funds rate at its current level. Instead, investors may pay close attention to the wording of the FOMC statement announcing the decision and, most especially, to Fed Chair Powell’s remarks in the press conference that will follow the meeting.

Following the November meeting, Powell said that the Fed was not convinced that the inflation battle had been won and that additional progress toward its two percent inflation goal may require further restrictive monetary actions. The news unsettled investors, who had hoped that the rate hike cycle had come to an end.

While Powell is unlikely to change the substance of his message, investors will be looking for any indication that his stance has shifted.

World Markets

The MSCI-EAFE Index gained 9.09 percent in November on moderate inflation and hopes of interest rate cuts.5

European stocks performed strongly, with advances experienced in France (+6.17 percent), Germany (+9.49 percent), Italy (+7.19 percent), and Spain (+11.54). The U.K. lagged a bit, picking up only 1.80 percent.6

Pacific Rim markets also saw solid gains, with Japan rising 8.52 percent. Hong Kong was the performance outlier, falling 1.65 percent as China continued to struggle.7

Indicators

Gross Domestic Product (GDP)

The second estimate of economic growth in the third quarter was revised higher, from 4.9 percent to 5.2 percent.8

Employment

Employers added 150,000 jobs in October, below September’s pace of a 297,000-job gain and the consensus forecast of 170,000 new jobs. The unemployment rate ticked higher to 3.9 percent, while average hourly earnings came in around expectations.9

Retail Sales

Consumer spending declined 0.1 percent in October, coming off a 0.9 percent increase in September. This was the first decline in retail sales since March. Year over year, retail sales rose 2.5 percent, below the level of price increases for that period.10

Industrial Production

Industrial output fell 0.6 percent, owing in large part to the strike by automotive workers. The decline was greater than the 0.4 percent that economists had been expecting.11

Housing

Housing starts rose 1.9 percent in October as builders took advantage of the ongoing shortage of existing homes’ resale inventory.12

Sales of existing homes declined by 4.1 percent month over month to a 13-year low, while sales from a year ago were down by 14.6 percent. The year-over-year gain in the median sales price was 3.4 percent due to the low inventory of homes on the market.13

New home sales fell 5.6 percent in October, though they were higher from a year ago by 17.7 percent.14

Consumer Price Index (CPI)

Consumer prices were flat in October and were higher by 3.2 percent from a year ago. Both numbers came in below Wall Street expectations. Core CPI, which excludes food and energy, also posted below-forecast results, rising 0.2 percent in October and 4.0 percent year over year. The annual Core CPI increase was the lowest in two years.15

Durable Goods Orders

Orders of goods designed to last three years or longer slumped 5.4 percent in October, led by a sharp decline in aircraft and automobile orders.16

The Fed

The FOMC elected to leave rates unchanged for the second consecutive meeting. The committee’s accompanying statement pointed to an improved assessment of the economy.

In his post-announcement press conference, Fed Chair Jerome Powell said that bringing inflation to the Fed’s two percent target was a long process, leaving open the possibility of a rate hike in December.17

By the Numbers: The Holidays