· S&P 500 up 8.9%, boosted by lower bond yields

• December strong for equities

S&P 500 Rally

November has historically been a robust month for equity returns, and this trend continued impressively this year; the index soared by 8.9%, marking its most remarkable performance since 1980, driven by a few major catalysts.

Better-than-expected economic data, lower yields, and tumbling oil prices all helped renew optimism that the Fed is done with its rake hiking campaign.

This renewed sense of optimism triggered increased investment activities, mirrored in the robust performance of the S&P 500, which now stands just 5% shy of its record high of 4796, achieved on January 3rd, 2022.

Goldilocks

Robust US Economic data points out that markets expect a soft landing for the world’s largest and most critical economy.

So far, Mr. Powell has been able to slay the inflation beast without serious growth scares or breaking something in the economy.

Price data showed that the various measure of inflation continues their decent, moving closer but still far from the 2% target by the Fed.

Third-quarter GDP results were revised upward to 5.2% (from 4.9%) on the back of strong government spending but partly offset by consumer spending.

Those positive macro surprises did not go unnoticed by bond traders and were immediately reflected in the lower bond yields.

The peak in bond yields coincided with the start of the S&P 500 November rally.

Lower costs of capital boosted company valuations.

On top of that, oil prices dropped, alleviating some stagflation fears. This decline translated into lower energy costs for consumers, giving them more spending power.

Currently, market participants expect rates not only to peak but also to be cut next year. The message was reiterated by legendary investor Bill Ackman, who bets that rates will be lowered as soon as Q1 2024.

Option traders do not see significant risks ahead. The VIX index, known as the fear index, dropped to its lowest levels in nearly 4 years as the move into risk-on assets lifted most asset classes.

It’s a pivotal point as the start of the cutting cycle marks has translated into strong returns for equities in the preceding months.

However, this rally is causing some valuation scares, including overconcentration fears, as few tech names, driven by the AI hype train, have delivered virtually all the S&P 500 year-to-date returns.

December rally?

Investors will monitor Powell on Dec 13th for a better sense of the policy path as the Fed is expected to leave rates unchanged on its last meeting of the year.

December is one of the best months, historically. In no other month stocks have a higher chance (74% of the time) to finish higher than the prior month.

A Santa rally is not out of the question, especially if the Goldilocks scenarios continue and investors’ optimism keeps gripping the markets.

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