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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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Most of US equities indices rose to record highs, as investors wagered that a “red sweep” (Republicans winning Presidency, Senate and Congress) would result in faster earnings growth, looser regulations, and lower corporate taxes. The small-cap Russell 2000 Index surged 8.57% for the week but was the sole benchmark to remain out of record territory. Meanwhile, the Dow Jones hit 44.000 for the first time while the S&P 500 closed just shy of 6,000, up 4.7% for the week, its best weekly gain in almost a year. On Thursday, the Fed announced a 25bps rate cut, its first easing move since cutting rates by 50 basis points in mid-September. In terms of economic data, the October ISM services sector activity came in at 56.0, well above expectations and the best reading since August 2022. U.S. Treasuries generated positive returns heading into Friday, as yields largely ended lower than where they ended the previous week.