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WEEKLY SUMMARY: Dovish Fed sparks bond and stock surge
The major US equities indices recorded gains during the week, with the S&P 500 Index finishing above the 4,000 level for the first time in two months. Favorable earnings reports in the retail and technology sectors as well as indications that the Fed is open to slowing its pace of rate hikes helped fuel the rally. Trading was light heading into the Thanksgiving holiday. The minutes from the Fed’s meeting said that a “substantial majority of participants” thought that slowing the pace of hikes would be appropriate, although the fed funds rate may end up higher than previously expected. Economic news was mixed, but signs of economic weakening generally seemed to support market hopes that the Fed would soon be able to ease its tightening pace. Yields of longer-maturity Treasury debt decreased more than shorter maturities, leading to a further inversion of the yield curve. Credit spreads of investment-grade corporate bonds tightened ahead of the holiday. European shares rose for a sixth consecutive week on hopes that central banks might slow the pace of interest rate increases. Indeed, business activity in the eurozone shrank for a fifth month in November, adding to signs that the economy may be in recession. Shares in China were modestly positive for the week as investors balanced new coronavirus restrictions against signs that authorities will provide more supportive measures to stimulate the economy. The dollar fell for the 5th week of the last 6.
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The Nasdaq Composite led gains, driven by strength in mega-cap tech firms benefiting from AI-related spending. Market gains were narrow — the S&P 500 rose even though most sectors fell, and the equal-weighted index lagged by 2.7%. About two-thirds of S&P 500 companies have reported earnings and 83% are beating expectations. Results from the “Magnificent Seven” were mixed: Microsoft, Apple, and Meta fell post-earnings, while Amazon and Alphabet rose. NVIDIA’s shares surged, briefly pushing its market value above $5 trillion. U.S. President Donald Trump and China’s President Xi Jinping agreed to a one-year trade truce, easing tensions between the two nations. The deal included U.S. tariff reductions, China suspending export controls on rare earths, and resuming purchases of U.S. agricultural goods. Meanwhile, the Federal Reserve cut interest rates by 25 basis points to 3.75%–4.00%, as expected, but signaled caution on further cuts.