The S&P 500 Rally Ends on a Sour Note at the End of a Historic Month

The robust rally in stocks this month faced challenges in gaining further momentum as traders responded tepidly to data reinforcing expectations that the Federal Reserve has concluded its hiking cycle. Despite the S&P 500 being just 5% away from its all-time high, signs of buyer exhaustion emerged, resulting in relatively unchanged equities. Treasury yields reversed direction at the end of the month, rising amid speculation that the market had gone too far in anticipating Fed rate cuts. The dollar, though on track for its most significant monthly decline in a year, advanced. Oil prices slipped, even after OPEC+ reached an agreement on more extensive output cuts.

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Recent indicators reflecting a cooling US economy, including subdued consumer spending, inflation, and a slowing labor market, added to the evidence of a gradual economic slowdown. The core personal consumption expenditures (PCE) price index, the Fed's preferred measure of underlying inflation, met economists' expectations.

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Sonu Varghese, global macro strategist at Carson Group, stated, "This is likely to cement expectations that the monetary policy inflection point is close, and the Fed will make at least one rate cut in the first six months of 2024." He noted that the Fed has acknowledged easing inflation, laying the groundwork for potential rate cuts amid a strong economy and low unemployment.

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While this perception triggered a November rally across various asset classes, concerns about an "overbought" market have sidelined many equity investors in the past week. Despite this, the S&P 500 is poised for one of its most significant November gains on record, climbing over 8%, a feat achieved fewer than 10 times since 1928. It also marks the index's best month since July 2022.

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Callie Cox at eToro emphasized that, for now, it remains a bull market until proven otherwise. She noted the Federal Reserve's narrative focusing on progress in inflation and the potential for cuts, cautioning about the slowing economy and the risk of a recession.

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In a positive sign for equity optimists, the Bloomberg Intelligence Economic Regime Index suggests that the worst of America's economic challenges may be behind. Despite potential economic weakness ahead, as long as the index stays above its lows, the outlook is favorable for the S&P 500, according to Gina Martin Adams, chief equity strategist at BI.

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As November concludes, Chris Verrone at Strategas noted that a strong November historically does not significantly impact the typical December Santa Claus rally. The bias indicates that a weak November performance is more likely to be followed by a robust December showing.

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Investors also heavily favored bonds in November, with the Bloomberg US Aggregate index, tracking investment-grade government and corporate debt, set for its best performance since the 1980s. Traders, however, faced challenges as the positive PCE number was already anticipated, leading to what Andrew Brenner at NatAlliance Securities referred to as "indigestion."

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Traders closely monitored remarks from US officials, with Fed Bank of New York President John Williams emphasizing that the benchmark lending rate is at or near its peak. San Francisco Fed President Mary Daly echoed this sentiment, stating that rates are in a "very good place" to control inflation. However, she clarified that she is not considering cuts, and it is premature to determine if rate hikes are finished.

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Brian Rose, senior US economist at UBS Global Wealth Management, cautioned that it is still too early to eliminate the tightening bias in the Fed's forward guidance. Fed Chair Jerome Powell's upcoming appearance is anticipated to provide further insights into the central bank's stance.

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