November rally continues, but is the year-end rally coming?

SINGAPORE – The November rally that kicked off after dovish comments by the United States Federal Reserve picked up momentum last week, fanned by hopes that a slowing US economy could prompt a central bank pivot on interest rates.

Falling producer prices, a cooling labour market, softening retail spending and a flattening consumer price index cheered investors hoping that these mark the beginnings of a downtrend in inflation.

Also boosting optimism was the fact that the 10-year Treasury yield remained subdued at below 4.5 per cent.

On Wall Street, the Dow Jones Industrial Average rose for the third consecutive week, putting on a weekly gain of 1.94 per cent to close at 34,947.28 points, while the S&P 500 continued to rally, up 2.24 per cent to 4,514.02 points. Meanwhile, technology stocks underpinned the Nasdaq’s solid 2.37 per cent weekly rise to 14,125.48 points.

The Dow is now up almost 6 per cent in November, while the S&P 500 has surged 7.6 per cent. And in what is considered a bullish technical reading, the S&P 500 and Nasdaq have reclaimed their 200-day moving average.

In Singapore, the abbreviated week (Nov 13 was a public holiday for Deepavali) saw the Straits Times Index ending the week up just 0.6 per cent to 3,124.67 on relatively low trading volumes. With dividends boosting total returns to 1 per cent, the year-to-date total return stands at 0.9 per cent.

Since dropping back below 3,150 on Nov 8, the benchmark index has spent much of its time range trading between 3,100 and 3,150 points.

The trio of local banks – which account for 25 cents in every dollar invested on the local bourse – were flat on the week. DBS declined 21 cents for the week, but went ex-dividend with 48 cents per share on Nov 14. OCBC ended the week flattish at $12.97, while UOB gave up 5 cents for the week at $27.35.

So what’s next?

The big question is whether the current rally has more legs going into the final six weeks of the year. Is the Santa rally around the corner?

The latest softer-than-expected US inflation data for October released last week has given rise to greater optimism that the Fed is done with rate hikes. It was not just the overall inflation figures that came in below expectations; the supercore US inflation rate, a measure the Fed tracks closely that includes core services minus housing, rose at about a third the pace of September, the slowest pace since July and the biggest monthly deceleration since October 2022.

On an annual basis, it was the weakest increase since December 2021.

Separately, the US producer price index for October also decreased by 0.5 per cent against expectations for a modest rise.

So the market is currently being fuelled by expectations that the US economy is headed for a soft landing – that is, lower inflation and slower growth, but no recession.

Is this optimism justified?

“The top question now for markets is whether traders and investors have been too hasty extrapolating a run of soft US macro data into a Fed easing cycle commencing from late Q1 2024,” wrote Mr Stephen Innes of SPI Asset Management. “The concern is that markets are now overestimating the chances of a full-on Fed accommodation.”

Indeed, those hoping for a soft landing could be ignoring the lagged effects of the sharp tightening in US monetary policy over the past 20 months, which has pushed borrowing costs to their highest levels in decades.

Mr Vasu Menon, managing director for investment strategy at OCBC Bank, warns that the US government may not have the resources to nurse the weakening US economy towards a soft landing.

“If the economy does slow down, this time around it cannot rely on fiscal policy to save the day as pandemic savings dry up and government spending may be cut to ensure smooth passage of the US Budget,” he said. “Eventually, President Joe Biden may have little choice but to scale back on fiscal spending to appease hawkish Republicans and to prevent a further loss of confidence in US assets given the sizeable US debt and budget deficits, keeping in mind the likes of Moody’s warning of a potential ratings downgrade.”

Could such a hands-off approach send the world’s biggest economy into a downward spiral, rather than engineer a gentle glide downwards?

That fear appears to be on the back burner for now. Everyone is looking forward to a Fed pivot. Morgan Stanley expects this could happen as early as June 2024.

When that pivot comes, it could trigger a huge wave of funds back into stocks and bonds.

By most estimates, there is some US$6 trillion (S$8.06 trillion) parked in high-yielding and low-risk money market instruments. If rates start sliding, this money will go in search of higher yields in stocks and bonds.

It has happened before.

During the global financial crisis in 2007-2008, we saw a large build-up of US money market funds to US$3.9 trillion, which was a record high then. However, once the outlook improved in January 2009, this sizeable pool of money market funds rushed back into the market and fuelled a significant rally in US and global equities.

For Singapore investors, the local bourse is chock-a-block with good companies – big and small – with strong businesses, good corporate governance and offering attractive dividends. On just a yield perspective, the S-Reits give over 8.5 per cent on a trailing basis. Market-wide, it is just above 4 per cent.

But the local bourse also suffers from an acute case of low liquidity. Risk aversion permeates the investment community, particularly on the retail front. There is also a short-termism in the investment psyche, overlaid with a lack of sophistication in interpreting financial numbers.

As a result, the approach to equity investing is more akin to taking a bet on a lottery, rather than playing the long game. Market players also tend to take their cues largely from offshore market movements, rather than from stock fundamentals and company outlook. As a result, many good Singapore stocks trade at super-low valuations.

Mindsets must change.

In terms of events, on Nov 20, market attention will focus on the US index of leading indicators, which is expected to show the economy weakening further.

On Nov 21, the Chicago Fed National Activity Index and the minutes of the US Federal Open Market Committee meeting are on the agenda. The latter will be scrutinised against the background of the latest comments by Fed chairman Jerome Powell, who said the Fed is not yet convinced that its tightening is sufficient.

On Nov 22, consumer confidence data for the euro area and US consumer durable goods orders are due, as are initial and subsequent jobless claims. The US labour markets will remain a key factor for the Fed’s future decisions, and the jobless claims numbers will be closely watched for clues of a softer employment market. 

Whether a year-end Santa rally materialises remains an open question, but the November rally appears to still have some legs.