Weekly Market Performance — December 15, 2023

LPL Research provides its Weekly Market Performance for the week of December 11, 2023. Highlights include another strong week for equities, a rebound in oil prices, bonds moving higher, and a dip in inflation.

Stock Index Performance

S&P 500 Index Sector

Fixed Income and Commodities

Source: LPL Research, Bloomberg 12/15/23
Disclosure: Indexes are unmanaged and cannot be invested in directly.

U.S. and International Equities

Markets Higher: Both the S&P 500 Index along with the Nasdaq Composite witnessed their seventh consecutive weekly rise. The dovish message from the Federal Open Market Committee (FOMC) meeting along with lower monthly inflation and unemployment have helped drive the economic soft-landing narrative. Small-cap equities benefited from this backdrop and outperformed for the week.

According to the most recent AAII Survey, sentiment remains bullish as bearish sentiment declines. The percentage of bullish investors increased to 51.3%, coming in well above the historical long-term average of 37.5%. Bearish investors declined to 19.3%, well below the historical average of 31.0%. Neutral investors increased to 29.4%.

Bank of America’s Bull & Bear indicator jumped to 4.7 from 3.8, representing its highest reading since February 2023 and its largest two-week increase since November 2015. EPFR Global reported inflows into U.S. stocks this week of $25.9 billion. This represents a ninth-straight week of inflows, representing the longest streak since December 2021.

Given the market’s appreciation this quarter, there is discussion about stock valuations looking increasingly stretched into year-end. Bespoke Investment Group notes that 10 of the 11 S&P 500 Index major sectors are now in overbought territory, with energy the only exception.

Fixed Income Higher: The Bloomberg Aggregate Bond Index continued higher this week amid additional momentum for peak Federal Reserve (Fed) hawkish monetary policy along with an increased belief in an economic soft-landing. Moreover, high yield bonds also gained ground this week.

With a still resilient economy to date, LPL Research believes Treasury yields could stay relatively high in the near term, although rates may subside a bit versus the volatility seen in 2023. The issuance of Treasury securities to fund budget deficits and the potential for the Bank of Japan (BOJ) to finally end loose monetary policies in 2024 could keep some upward pressure on yields. However, the big move in yields may have already taken place, and with a potential directional change in interest rates likely coming in 2024, we believe bonds offer compelling value.

Commodities Mostly Higher: Oil prices rebounded for their first weekly increase in two months amid a bullish forecast from the International Energy Agency for oil demand next year. Robust natural gas production and benign weather have caused natural gas prices to recede. Moreover, European inventories are witnessing surplus levels amid weak demand as the Eastern European crisis continues.

Prices for precious metals, along with copper, increased following the Fed’s adoption of a more dovish tone, signaling the end of its tightening cycle. There are some discussions concerning higher long-term copper prices as one of the world’s largest copper mines was forced to shutter operations. Moreover, last Friday, Anglo American cut its copper production forecasts for the next two years.

Economic Weekly Roundup

December FOMC Meeting Recap: The Fed revised their 2024 growth projection down to 1.4% from 1.5% as higher-frequency data suggest the economy is slowing. Inflation metrics are clearly on a path of disinflation, and yields are responding accordingly. The Fed statement did not change much, but the subtleties were definitely market-moving. The insertion of ‘any’ likely implies the Fed will no longer increase rates from here.

The updated Summary of Economic Projections is pushing back on market expectations that the Fed will dramatically cut rates next year. However, Fed forecasts rarely, if ever, coordinate with actual policy rates. Historically, dot plot medians tend to overestimate policy rates, sometimes by a wide margin. The most egregious example appears to be in 2015, when the Committee expected interest rates in 2017 to be above 3.5%, when they were closer to 0.50% that year.

November Retail Sales: Given the holiday shopping season started early this year, investors should look at all of November's sales, not just Black Friday or Cyber Monday. After a downward revision to October, retail sales in November rose 0.3% from a month ago, supported by another strong month of restaurant spending. Auto sales recovered after falling in October, the most since February of this year. Better pricing and incentives brought consumers back to car lots in November.

November Consumer Prices: The November annual rate of inflation dipped to 3.1% from 3.2% last month as energy prices continued to plummet. Goods prices declined month over month, suppressed by a 1.3% decline in apparel, the largest monthly decrease since the onset of the pandemic. Rising shelter costs, medical care, and car insurance prices were the main drivers in November’s CPI.

Japanese Business Sentiment Near 2-Year Highs: Japanese manufacturers' business confidence reached a near two-year high in the three months to December, as some believe that economic conditions needed to unwind government stimulus are near. In addition, non-manufacturer sentiment also improved to levels not seen since 1991, given concerns that weak consumer consumption might weigh on the fragile economic recovery.

European Industrial Production: European industrial production continues to decline across the Eurozone as higher interest rates have weighed heavily on investment and demand. The downward trend is expected to indicate weakness for a fifth consecutive quarter, but with the European Central Bank (ECB) pausing on interest rates again at its meeting this week, a more favorable rate environment could help spur demand. The widely followed German ZEW investor sentiment survey suggests confidence is rising as expectations build for interest rates to be lowered in the medium term.

Weekly Employment Report: Continuing claims came in above the prior week but below analyst expectations. Initial claims came in below analyst expectations and the prior week’s readings. LPL Research believes the labor market is expected to further loosen over the coming months as companies respond to slowing demand, partly driven by the lagged effects of tighter monetary policy.

The Week Ahead

The following economic data is slated for the week ahead:

• Monday: NAHB Housing Market Index (Dec)
• Tuesday: Building permits (Nov), housing starts (Nov), housing starts (Nov)
• Wednesday: Client accounts (Q3), consumer confidence (Dec), existing home sales (Nov)
• Thursday: Weekly initial and continuing unemployment claims, GDP (Q3), leading indicators (Nov)
• Friday: Durable orders (Nov), Core PCE (Nov), PCE Deflator (Nov), personal consumption expenditures (Nov), personal income (Nov), Michigan sentiment (Dec), new home sales (Nov)