As November draws to a close, Wall Street is set to wrap up the month on a robust note, with stock indices eyeing new highs as the year concludes.
Investor sentiment remains buoyant this month, fueled by a surge in major averages, primarily driven by subdued inflation reports hinting at a possible cessation of Federal Reserve rate hikes. This has ignited optimism among investors, speculating on potential rate cuts in the forthcoming year.
Foreseeing a pause in the Fed's current cycle of interest rate hikes, many investors express confidence in the continuation of the stock market's upward trajectory following a recent strong rebound.
The month has witnessed a vigorous rally in major averages, notably the Nasdaq Composite, which has surged by over 10%. This upward momentum is attributed, in part, to diminishing Treasury yields, amplifying the present value of future earnings. The 10-year Treasury note yield's dip below 4.5% in November represents a significant decrease from the previous month's peak above 5%.
Recent market gains found impetus in last week's report indicating a moderation in October inflation, reinforcing the belief that the Fed has concluded its rate-hiking cycle. This has heightened investor expectations of an imminent commencement of the central bank's policy easing.
An examination of historical performance post the final rate hike in previous cycles reveals an encouraging trend. In five out of the last six rate-hiking cycles, the S&P 500 witnessed double-digit returns. Notably, in 2018, despite a more than 6% drop in the S&P 500, the index rebounded by over 30% in the 12 months following the last rate increase in December, with the Nasdaq experiencing an impressive surge of almost 37%.
In another instance, after the final rate hike in June 2006, the S&P 500 gained 18% in the subsequent 12 months, even amid the looming Global Financial Crisis. The Nasdaq and the Dow each saw gains of more than 19% in the following year, while the Russell 2000 recorded an increase of over 16%.
Fullerton Markets Research Team
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