Fed Chair Jerome Powell indicated on December 13th that the current Federal Reserve rate hiking cycle is complete, and that its next move will likely be to cut rates in 2024. Stocks and bonds increased on the news. The S&P 500 rallied 1.37% while the Bloomberg US Agg Total Return Index (“the Agg”) increased 1.31%. The rally was not limited to the higher-quality sections of the markets. Small and mid-cap indices outperformed the S&P 500 while credit performed well too. None of this should come as a surprise. Markets had been rallying before the Fed announcement and subsequent press conference. The S&P 500 has increased 9.77% quarter-to-date through the December 13th close. The Agg has increased 5.47% so far this quarter to more than make up losses of 1.21% through the first nine months of the year.
There are several reasons for the excellent fourth quarter performance. The fourth quarter is historically a good quarter for equities. Despite this, many investors were positioned too conservatively at the end of the third quarter. Additionally, earnings estimates have stabilized and moved slightly higher. On the economic front, inflation data has moderated without leading to unemployment losses. The labor market remains strong, and jobs are still being created. Improving inflation data has contributed to the bond market rally. The yield on the Ten-Year Treasury Bond peaked at 5.02% intraday on October 23rd but ended December 13th slightly above 4%. Add it all up and a soft landing has become the base-case for the economy followed by a shallow recession.