Stock Market Treads Water After $2.7 Trillion Rally

Stocks fluctuated following a $2.7 trillion surge in November driven by expectations that the Federal Reserve would halt its interest rate hikes to prevent an economic downturn. The dollar reversed its 2023 gains.

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The S&P 500 remained relatively unchanged, though it continued towards its lengthiest streak of weekly gains since July. The market faced potential instability as numerous derivatives contracts linked to stocks and indexes were set to mature on Friday. Applied Materials Inc. experienced a decline after reports surfaced of a US criminal investigation into alleged violations of export restrictions to China. Conversely, homebuilders saw gains as new US home construction unexpectedly increased.

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After an impressive surge in risk-taking, Bank of America Corp.'s Michael Hartnett advised investors to divest these assets due to emerging technical and macroeconomic challenges, recommending a cautious approach.

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The dollar depreciated, heading for its most significant monthly decline in a year. Weaker-than-anticipated economic data supported expectations that the Fed had concluded its tightening cycle, contributing to speculation that the US currency had already peaked. Ten-year yields hovered around 4.4%. Oil rebounded after entering a bear market.

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Traders closely monitored recent statements from Federal Reserve officials. Fed Vice Chair for Supervision Michael Barr reiterated that officials are likely approaching the end of their tightening efforts. Fed Bank of San Francisco President Mary Daly expressed uncertainty about inflation reaching the 2% target. Boston Fed President Susan Collins highlighted that increased labor force participation could alleviate imbalances between demand and supply, fostering strong growth without necessarily causing inflation.

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Global stock funds attracted $23.5 billion in the week through Nov. 15, the second-highest inflows of the year, as reported by Bank of America, citing data from EPFR Global.

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An analysis by Bloomberg Intelligence revealed that high-quality stocks, characterized by high profitability and low leverage, are presently considerably more expensive than both the overall market and their lower-quality counterparts. Similar valuation premiums for quality stocks occurred in 2020 and 2008-2009 during times of market panic and turmoil when investors sought refuge in safer, high-quality investments.

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Solita Marcelli, Chief Investment Officer for the Americas at UBS Global Wealth Management, emphasized that historically, quality stocks have outperformed in the late stages of the business cycle, offering portfolio protection if the economy experiences a more significant slowdown.

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Despite this week's bond market rally, Franklin Templeton's Sonal Desai expressed concern, suggesting that the rapid decline in yields may be driven more by a fear of missing out than a rational response. She indicated that the pace of the bond market rally may have overshot, especially as expectations of rate cuts for the next year are likely to be reevaluated.

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In other economic news, UK retail sales unexpectedly declined in October, suggesting that a series of interest rate hikes to combat inflation might be affecting economic activity. Bundesbank President Joachim Nagel indicated that a reduction in European Central Bank interest rates is not imminent.

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