The Weekly Wrap: BayFort Capital

US stocks rally continued in the fourth week of November, with both small caps and large caps rallying for the week driven by investor expectations of a rate cut in first half of CY24. The S&P 500 closed up 1% for the week (8.87% MTD), Dow gained 1.27% while the Russell 2000 increased by 0.54%. The week was holiday-shortened trading week—markets were closed on Thursday for Thanksgiving and shut down early on Friday. Growth stocks fared better than value stocks during the week. The Commerce Department announced on Wednesday that durable goods orders for October declined by 5.4% YoY. Orders for non-defense capital goods excluding aircraft, which are a significant indicator of business spending intentions, decreased by 0.1% following a revised 0.2% decline in the previous month. Initially, these core capital goods orders were reported to have increased by 0.5% in September.

The US 10-year Treasury yield was almost flat for the week at 4.47%, and ditto for the US 2-year Treasury yield at 4.95%. Robust demand for a USD 16 billion auction of 20-year U.S. Treasury bonds on Monday alleviated concerns sparked by a lackluster 30-year Treasury auction earlier in the month. Moreover, the latest Fed minutes indicated a cautious approach toward future rate increases. Officials unanimously stressed the importance of a thorough evaluation and significant progress in controlling inflation. The consensus to keep rates unchanged received broad backing, demonstrating a dedication to tempering economic growth until a consistent advancement toward the 2% inflation target is achieved. The market anticipates a 1% reduction in interest rates in 2024, with an initial rate cut in June 2024.

European stocks soared with the Stoxx 600 index climbing 0.91% this week as investors bet on upcoming rate cuts in the first half of CY24. In Europe, ECB minutes underscored that worries persist regarding economic contraction and uncertainties like geopolitical events. Despite these apprehensions, the ECB maintains a cautious approach toward reducing rates, anticipating a return to the 2% inflation target in the second half of 2025. Similar to the U.S., the market expects the ECB's initial rate cut to occur in June 2024. ECB President Christine Lagarde suggested that rates might remain unchanged for "the next couple of quarters," whereas France’s François Villeroy de Galhau indicated that rates have reached a level where they will likely remain stable for the next "few quarters." Belgium’s Pierre Wunsch expressed the view that the ECB will probably maintain the status quo in both December and January. In its autumn budget, the UK government revealed tax reductions for employees, encouraging initiatives for business investments, and steps to bolster the housing market. According to the Office for Budget Responsibility (OBR), the economy is expected to grow by 0.6% this year. However, the OBR significantly reduced its growth projections for 2024 and 2025 by approximately half to 0.7% and 1.4%, respectively.

BayFort Capital View: The US Federal Reserve, Bank of England, and European Central Bank have all paused their interest rate hikes, suggesting that we are near the peak of the interest rate cycle. The UK implemented additional fiscal easing measures by introducing tax reductions, offering incentives for business investments, and supporting the housing sector in its budget. Both the US and the EU are moving towards disinflation, with the labor market, CPI, and wages softening in October. As a result, the risk of even higher Treasury yields is decreasing and US Treasuries appear to be one of the most attractive investments in the current environment. Nonetheless, for investors looking for a more leveraged strategy to benefit from a sharp stock market upturn linked to falling Treasury yields (as witnessed over the last few weeks), stocks exhibiting a strong positive correlation to lower Treasury yields offer a compelling alternative.