M'm, M'm M'm, M'm http://www.federatedhermes.com/us/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedhermes.com/us/daf\images\insights\article\food-holidays-small.jpg November 17 2023 November 17 2023

M'm, M'm

Markets are serving up rallies for the holidays.

Published November 17 2023
My Content

First stop this week: Hershey, Pa., “the sweetest place on earth,” and a warm welcome at a long-standing annual banker’s event where my shoes are always appreciated. To start the holiday season, I wore my wine velvet black-bow Prada kitten heels which impressed. “I’d better go visit the outlet mall and get some new shoes!” my gentleman colleague remarked, feeling underdressed. With October retail sales slipping and Black Friday just around the corner, he’s sure to find some good deals. (Prada never goes on sale, unfortunately.) Almost all the data this week (more below) reflected a slowing economy. CPI & PPI (the latter plunging the most since Covid shut down the world in April 2020). Import & export prices. Home builder confidence near pandemic-era lows. Industrial production. A bright spot was another uptick in housing starts. Fears the 10-year Treasury yield may bounce above 5% again evaporated as the week’s data rolled out, along with talk of a potential Fed hike in December. Now, it’s about “how many” rate cuts and “when.” Renaissance Macro believes policymakers have enough ammunition to initiate “surgical rate cuts early next year.” Consensus doesn’t see it coming that fast. But CME Group’s tracking of fed futures puts a 70% chance of a cut in May and a total of four in ’24.

Anticipation of a dovish pivot is feeding stock and bond rallies. The 10-year Treasury yield at this writing was down another 20 basis points this week, and in equities, Tuesday (CPI day) saw a surge in breadth as groups hit hardest by rising yields (small caps, defensives and banks) significantly outperformed in a market that was up sharply. Regional banks had their best day since 2020, the Russell 2000 rose the most in a year and there was further strength in large-cap Tech and homebuilders—an ETF trading in the former hit an all-time high, while the latter is up 20% from October lows. While Wolfe Research says the run-up felt a little like buying capitulation, it saw the strongest breadth since early ’13 as a sign of a potential reversal of this year’s top-heavy market, where the Magnificent Seven have accounted for most of the S&P 500’s year-to-date gains. Evercore ISI thinks the S&P could set an all-time high above 4,800 by the end of January, with Tech staying strong, the rest getting strong and the most beat-up corners of the market rejoining the fight as inflation, rates, policy, the dollar and crude keep falling in the seasonally strongest period for stocks. It notes equities have surged off long-term support at extreme oversold conditions at every major market low since the GFC (’11, ’16, ’18, ’22, ’23). Despite signs the market may be near-term overbought, bullish momentum looks to carry the day.

What if the slowdown is a harbinger of something worse? One popular indicator suggests whenever the unemployment rate rises more than half a percentage point off its low (it’s up fourth-tenths of a point so far), there’s a recession. Soft landings are hard to pull off. But those worries will take time to manifest. In the meantime, it’s the holidays! After Hershey, it was off to Miami, a vibrant, bilingual (at minimum), booming city, which the Financial Times says has become “the most important city in America” with numerous billionaires wagering it will overtake New York City as the financial capital of America. “There are a lot of oenophiles here,” I was told, and the restaurant scene is on fire. “You’ve got to wait three months to get a reservation” at the most popular spots. My first presentation was before a female audience, dressed to the nines (l held my own), in a discussion about women in investing. This group was fired up (“You’ve got to be a CEO to make money”) and most complimentary—“You will go far.” (Well, that’s the nicest comment since a gentleman a number of years ago asked me on Q&A if I was single.) Lunch was spectacular. I refused the profiteroles, the dessert for which this restaurant is known, only to be served them by the Spanish speaking waiter who explained, “My English is not good.” M’m! M’m!


  • Disinflation October CPI & PPI were softer than expected, with a sharp slowing in shelter and declines in energy and used-car prices driving the CPI surprise. Without the outsized owners’ equivalent rent component, both headline and core CPI are now below Fed targets, estimates TrendMacro. It even thinks deflation ex-housing data will begin to show up next quarter.
  • Global green shoots Investor sentiment rose again across the pond, with Germany’s ZEW gauge nearly doubling expectations to reach its highest level since March. Expectations for the euro area economy also rebounded sharply to a 9-month high. To the East, there were indications Chinese officials were readying more aggressive stimulus to boost its sagging economy.
  • We must keep an eye on margins With Q3 earnings more than 90% complete, expected earnings growth was at 6.3%, four times the Oct. 1 estimate of 1.6%. Lower costs aided profits (earnings grew faster than revenues), helping S&P 12-month forward operating margins continue to climb.


  • Consumers won’t go down easily Retail sales edged down less than expected in October, and excluding autos (where the UAW strike impacted availability) and gas (where falling prices pulled down nominal sales), core sales rose. An already strong September also was revised higher. The results position consumer spending for a solid Q4 gain, albeit slower than Q3. This was captured in Q3 earnings calls, with companies broadly characterizing consumers as resilient but more cautious and discerning. “Lackluster,’’ “choppy,” “muted,” “uneven” were among common descriptions of demand.
  • Sticky wages Difficult credit conditions, weak earnings and subdued expectations kept small business optimism near historical lows in October. NFIB survey respondents cited inflation and labor quality as their biggest problems, though pricing worries have eased consistently since their July ’22 peak. The struggle to find workers continues—43% have unfilled positions, and the percentage raising or planning to raise compensation keeps climbing, suggesting wage pressures will stick around.
  • The strike effect October industrial production fell the most in four months on a drop-off in manufacturing that accounts for roughly four-fifths of overall activity. UAW strikes against the Big Three & Mack Trucks drove a 10% plunge in motor vehicles & parts production. Ex-motor vehicles, manufacturing eked out a gain, setting the stage for a bounce-back with the ratification of new contracts. Another sign: November Empire & Philly Fed gauges surprised to the upside.

What else

The alluring smell of jet fumes Few things motivate Congress more than a pending vacation, Cowen & Co. observes. But it doesn’t expect new House Speaker Johnson’s honeymoon from the far right to last as the continuing resolution averting a shutdown by extending spending only runs past the holidays.

Election Day is 353 days away Sen. Manchin’s decision to forego re-election and tour the country instead raises odds that he enters the presidential race as a third-party candidate. He’d most likely run on the No Labels ticket. The organization already has ballot access in 10 states, cash raised and a vehicle for disgruntled GOP and Dem donors who favor neither Biden nor Trump as their parties’ nominees.

Election Day is 353 days away A Financial Times poll found only 14% of U.S. voters believe they are better off financially now than when Biden took office. Nearly 70% thought the president’s economic policies had either hurt the economy or had no impact, including 33% who said his policies had “hurt the economy a lot.”

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Tags Equity . Markets/Economy .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Past performance is no guarantee of future results.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

Consumer Price Index (CPI): A measure of inflation at the retail level.

Magnificent Seven: Moniker for seven mega-cap tech-related stocks Amazon, Apple, Google-parent Alphabet, Meta, Microsoft, Nvidia and Tesla.

Producer Price Index (PPI): A measure of inflation at the wholesale level.

Russell 2000® Index: Measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. Investments cannot be made directly in an index.

Small company stocks may be less liquid and subject to greater price volatility than large capitalization stocks.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Stocks are subject to risks and fluctuate in value.

The Empire State Manufacturing Index gauges the level of activity and expectations for the future among manufacturers in New York.

The Federal Reserve Bank of Philadelphia gauges the level of activity and expectations for the future among manufacturers in the Greater Philadelphia region every month.

The National Federation of Independent Business (NFIB) conducts surveys monthly to gauge how small businesses feel about the economy, their situation and their plans.

The ZEW Indicator of Economic Sentiment polls financial experts to gauge whether they are optimistic or pessimistic about the subsequent six months.

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