Weekly Market Commentary - Dec 12th, 2023

Stocks climbed as Treasury yields ticked higher following a robust November jobs report that showed unemployment falling to a 50-year low of 3.7% even as wage gains moderate. The resilience affirms underlying economic health.

Consumer sentiment also improved as inflation expectations eased. With price pressures incrementally cooling, markets increasingly expect an impending Fed pivot to pause aggressive tightening.

The S&P 500 built on its best month since 1976, while the Nasdaq hit its highest levels since September as tech stocks rallied. Avoiding irrational exuberance still makes sense with policy restrictions. But data dependencies support a 2023 Fed shift.

November’s jobs report handily beat expectations by adding 199,000 positions, demonstrating no signs of feared weakness. Unemployment falling to lows near 50-year records further defied recessionary signals.

The resilience kept wage growth elevated at 5.1% annually but below October’s 5.4% pace. With compensation gains moderating, markets hope stubborn inflation also slows further, enabling easier Fed policy that supports growth.

While one month alone is no definite trend, the firmly strong employment backdrop counters gloomy outlooks. This fundamental health maintains pressure on the Fed to stay vigilant on inflation until clear cooling permits dovishness.

Despite substantial market volatility this year tied to tightening policy and growth worries, resilient tech sector strength lifted sentiment again this week.

Software and semiconductor stocks rallied amid enthusiasm over expanding addressable markets linked to promised efficiency gains from artificial intelligence and machine learning. Nvidia gained over 4%, while Google parent Alphabet jumped 5.3%.

Though speculative excess warrants caution in pockets of tech, durable growth leaders maintained impressive traction. Continued adoption of digital transformation and automation allows outpacing unsteady economic crosscurrents over lengthy horizons.

With risks still skewed lower until definitively cooling inflation or clear Fed shifts materialize, maintaining balance suits the crosscurrents. But upside exposure warrants retention to capitalize on policy improvements.

For Conservative Portfolios

The stabilization and then modest uptick in Treasury yields enable conservative investors to incrementally improve income streams and participate in further equity upside if the rally endures. This can be achieved through target date bond ladders along with adding exposure to durable dividend aristocrats exhibiting steady payout growth.

However, maintaining below-benchmark duration is still advisable, given policy uncertainties. Raising cash reserves helps prepare for episodic volatility while keeping dry powder ready to deploy into inevitable pullbacks for asset class rebalancing.

For Growth Portfolios

Given considerable ongoing volatility, growth investors may continue paring extended software and semiconductor stock exposure during periodic rallies to balance risks. Yet transformative technology leaders like cloud infrastructure and cybersecurity providers warrant enduring commitment to their impressive secular growth trajectories even as tightening policy and inflation clouds linger in the coming months.

Rather than market timing, adhering to disciplined rebalancing between rallies and pullbacks prevents emotion from overriding long-run return objectives centered on innovation. Patience during turbulence enables compounding gains.

For Opportunistic Portfolios

With volatility enduring until definitive macro clarity finally emerges, tactical traders can maintain positioning to harvest alpha in both directions by blending exposures across various stages of mean reversion. Although broader risks skew lower currently, substantial upside potential exists in neglected areas if the pivot hopes to reverse.

Maintaining prudent use of options leverage allows opportunistic investors to manage periodic spikes in episodic volatility while retaining sufficient exposure to capitalize on market dislocations born out of investor complacency when trends take sudden turns.

Despite mounting optimism on the Fed policy outlook as inflation shows early signs of subsiding, key economic data and guidance from central bankers promise extended periods of volatility as markets react.

While recent earnings results exceeded diminished expectations, currency impacts could still pressure multinationals operating overseas as the dollar remains substantially elevated historically. Critical holiday sales figures will shape related retail outlooks. Wage growth trajectory needs monitoring as well since labor costs pressure margins.

However, current valuations for equities now largely bake in serious economic sluggishness through 2023. This sentiment extreme allows room for upside surprises should resilient consumers extend expenditure gains or if disinflation accelerates enough for Fed dovishness sooner than projected.

For long-term investors, judiciously navigating foreseeable near-term crosswinds by maintaining balanced exposures could lead to a substantial opportunity to capture renewed upside as the aging bear market enters its final phases. Stay invested in durable return drivers, but stay tactically nimble.

Sources:

NASDAQ

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