Is Market Getting Enough 'Certainty' to Rally?

Markets don't like uncertainty—and there's been a lot of it in 2023. Mitch looks at whether things have settled down enough to spark a sustained rally. [Mitch on the Markets] Is the Market Finally Getting The “Certainty” Needed for a Sustained Rally? Markets don’t like uncertainty. And in the late summer and early fall, uncertainty is what the markets got. In early August, the company Fitch Ratings lowered its rating on the U.S. to AA+, one notch down from the top AAA grade. The downgrade came nearly two months after a debt ceiling deal was struck – with worries about debt default gone – but the headline risk was enough to unsettle markets.1 Later in the month, news kept emerging from China that the world’s second-largest economy was in trouble, with a beleaguered property market, weak exports, and sagging consumer spending. Meanwhile, the global price of a barrel of crude oil kept climbing from July, rising over 20% in just a few weeks (likely because of weak China demand coupled with Saudi and Russian production cuts). Interest rates also made a significant move higher, with the 10-year U.S. Treasury bond climbing from 3.86% at the beginning of July to 4.88% by the end of October. Stocks sank as rates rose. To top it all off, on October 7th, Hamas attacked Israel setting off a second war in addition to the Russia – Ukraine conflict. Markets were jittery as everyone wondered if the war would escalate into a regional conflict, involving other countries. --------------------------------------------------------------- [Feeling Uncertain? Don’t Miss Our Latest Stock Market Outlook Report!]( Trying to time the market, is never the ideal option. Instead, I recommend staying focused on key economic indicators to protect your investments from market uncertainties, such as inflation and high-interest rates. To help you do this, we are offering all readers a look into our just-released [December Stock Market Outlook Report](. This report will help investors prepare for market downturns and provide insight, such as: - Top-down S&P 500 year-end 2023 target - Setting return expectations for 2023 - International update on key global regions - And more… If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! [Download the December 2023 Stock Market Outlook Report 2]( --------------------------------------------------------------- Uncertainty prevailed. Looking ahead to the last few weeks of the year, however, I think markets are starting to see a clearer path forward, particularly in three areas that matter most: inflation, interest rates, and earnings. Below, I walk through each. 1. Inflation and the Central Banks If we’re reading between the lines, virtually every developed world central bank has indicated that they are done raising rates in this cycle. I say “reading between the lines” because no central bank has declared they’re done – it’s more about posturing/positioning while also keeping in mind economic data across each country. At their most recent meetings, the Federal Reserve, the European Central Bank, and the Bank of England all left rates unchanged. In the U.S., with long rates pressured higher and the Fed no longer convinced that higher unemployment and weak economic growth are needed to pull inflation lower, all signs point to a long pause – perhaps followed by cuts sometime in 2024. Inflation pressures continue to ease globally, and the likelihood of slower growth (see next point) should temper consumer spending (demand) enough to force corporations and small businesses to pull back on raising prices. Why this all matters: when the Fed has finished hiking rates historically, stocks have performed well with the interest rate ‘certainty’ that comes with it. In the previous seven Fed hiking cycles, stocks and investment-grade bonds outperformed cash by 19% and 14%, respectively, over the following two years. 2. Slowing Growth and Interest Rates Recent economic data in manufacturing, services, and even the labor markets have pointed to fading economic growth momentum – which investors should view as a positive. But the U.S. economy is also giving another signal of a potential ‘soft landing’ via gains in productivity. The latest productivity print – which measures how much workers produce per hour – showed the biggest gain in three years. Unit labor costs also fell, which reduces a company’s need to pass along rising costs through higher prices. This data suggests the businesses may be landing in some form of equilibrium – not too hot, not too cold – where growth moderates but can be maintained. As interest rates tend to respond to changes in growth rates and growth expectations, this data suggests upward pressure on rates could too be fading. Bond markets received some other good news in November as well, when the U.S. Treasury said it plans to borrow less in Q4 than previously anticipated, while also indicating its intent to issue fewer longer-dated bonds. These developments arguably ease market worries about too much supply of new bonds, and provide additional ‘certainty’ on rates looking ahead. 3. Earnings Turning a Corner With Q3 2023 earnings season behind us, we can say the overall earnings picture remains stable and largely positive. Earnings growth for the S&P 500 index, which was negative for each of the preceding three quarters, turned positive in Q3, even with a continued Energy drag. The earnings growth pace is expected to steadily improve in the coming periods – uncertainty turned to certainty. 3 One factor to flag is that earnings estimates for Q4 have been coming down, as seen in the chart below. I would reframe this as a positive, however, as it makes exceeding earnings expectations in the final quarter of the year easier. [MOTM_12022023_graph1] Source: Zacks Investment Research Bottom Line for Investors With major central banks posturing to stop rate hikes, inflation still in a downtrend, upward pressure on interest rates easing as the economic growth shifts lower, and earnings growth turning a corner, I would argue that the market is seeing some ‘uncertainty relief’ as compared to summer and early fall. The geopolitical situation is still unsettling, but markets have already priced in the economic impact of both wars, in my view. Looking ahead, if the U.S. economy experiences slower growth in Q4 while inflation ticks lower and the Fed stays on hold, I think markets will start looking much further ahead to an ongoing earnings recovery and the possibility of a rate cut on the horizon. To get more market insights, take a look at our [December Stock Market Outlook Report 4](. In this report, you’ll discover Zacks’s view on: For example, you'll discover Zacks’s view on: - Top-down S&P 500 year-end 2023 target - Setting return expectations for 2023 - What produces 2024 optimism - What’s alive for 2024 pessimists - International update on key global regions - And more… Prepare your portfolio for what lies ahead by reading this new report today. [Claim Your Free Report]( About Zacks Investment Management Zacks Investment Management was born out of one of the country’s largest providers of independent research, Zacks Investment Research. Our independent research capabilities from our parent company truly distinguish us from other wealth management firms - our strategies are derived from research and innovation, including the proprietary Zacks Rank stock selection model, earnings surprise and estimate revision factors. At Zacks Investment Management, we work with clients with $500,000 or more to invest, and we use this independent research, 35+ years of investment management experience, and tools we’ve developed to design customized investment portfolios based on each client’s individual needs. The end result is investment management that is research driven, results oriented and client focused. [Mitch on the Markets] Talk to a Zacks Wealth Advisor today. [Schedule Your Chat]( [facebook]( [linkedin]( [twitter]( © Zacks Investment Management | [Privacy Policy]( 1[J.P. Morgan. November 3, 2023.]( 2 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion. 3[Zacks. November 15, 2023.]( 4 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion. DISCLOSURE Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals. 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