What to Keep in Mind When Interest Rates Rise
A late rally at the end of the month helped push stocks higher in November, marking the second monthly advance in a row. Each of the benchmark indexes posted solid monthly gains, led by the Global Dow, which advanced nearly 11.0%. The large caps of the S&P 500 and the Dow rose more than 5.0%. The Nasdaq climbed 4.4%, while the Russell 2000 added 2.2%.
Investors welcomed news from Federal Reserve Chair Jerome Powell, who announced that the pace of interest-rate hikes can slow as soon as December, which likely means a 50-basis point increase, ending the string of 75-basis point rate hikes. The Fed may be taking note of the fact that the labor market has begun to cool (see the employment report below), while consumer price increases are showing signs of moderation. Nevertheless, prices remain elevated entering the holiday shopping season. However, business conditions remained generally positive, and consumers continued to spend, despite rising interest rates and decreasing levels of confidence (see report below).
Despite the relative good news from the Federal Reserve, Wall Street faced the ramifications of political unrest in China over that nation's COVID-related restrictions. The issues in China are likely to have a negative impact on the global economy, particularly the U.S. economy, as China is a main source of the global supply-chain system, which is still trying to recover from the pandemic.
A drop in U.S. crude supplies boosted crude oil prices at the end of November. Nevertheless, prices ended the month lower for the fifth loss in the last six months. China's COVID restrictions impacted the demand for crude oil, helping to keep prices muted. Prices at the pump declined in November. The national average retail price for regular gasoline was $3.534 per gallon on November 28, down from $3.742 on October 31 but $0.154 higher than a year ago.
Bond prices rose in November, pulling yields lower. Ten-year Treasury yields fell 37 basis points. The Treasury yield curve, often seen as a warning sign of an impending recession, recorded its steepest inversion in over 40 years as the 10-year Treasury yield dropped 0.78 percentage point below the two-year yield. The dollar slid lower against a basket of world currencies. Gold prices rose 9.0% in November, ending a streak of seven consecutive monthly declines.
|MARKET/INDEX||2021 CLOSE||PRIOR MONTH||AS OF 11/30||MONTHLY CHANGE||YTD CHANGE|
|FED. FUNDS||0.00%-0.25%||3.00%-3.25%||3.75%-4.00%||75 bps||375 bps|
|10-YEAR TREASURIES||1.51%||4.07%||3.70%||-37 bps||219 bps|
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
Eye on the Month Ahead
Rising inflation, and the government's response to it, continued to influence the market in November. The Federal Open Market Committee increased the federal funds rate by 75 basis points in November for the fourth time this year. However, indications are that the Committee may scale back interest-rate hikes beginning in December. Oversupply and waning demand drove crude oil prices lower in November. Nevertheless, prices are expected to rise again in December as the cold weather should increase demand. As to the stock market, December is usually a good month for equities, which should make for a solid fourth quarter.
Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI, Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). News items are based on reports from multiple commonly available international news sources (i.e., wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Forecasts are based on current conditions, subject to change, and may not come to pass. U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities and other bonds fluctuates with market conditions. Bonds are subject to inflation, interest-rate, and credit risks. As interest rates rise, bond prices typically fall. A bond sold or redeemed prior to maturity may be subject to loss. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 largest, publicly traded companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. The U.S. Dollar Index is a geometrically weighted index of the value of the U.S. dollar relative to six foreign currencies. Market indexes listed are unmanaged and are not available for direct investment.
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