Stocks And Bonds Rally For Another Week On Renewed Hopes Of Soft Landing – What Is Ahead?

U.S. stocks and bonds rallied for another week on renewed hopes among traders and investors of a soft landing for the U.S. economy.

This time, the rally was broad, led by interest rate-sensitive stocks like homebuilders, retailers and small caps.

The S&P 500 closed at 4,514.02, up 2.5% for the week; the Dow Jones at 34,947.10, up 2%; the tech-heavy Nasdaq at 14,125, up 3.1% and the small-cap Russell 2000 at 1797.77, up 5.8%.

These gains came on top of the rally of the previous two weeks when the S&P 500 was up a cumulative 6%, the Dow Jones 4.5%, and the Nasdaq 7%.

Equities got a boost from lower bond yields, with the benchmark 10-year U.S. Treasury bond ending the week with a yield of 4.44%, down from 4.66% from the previous week and 4.92% a month ago.

The bullish sentiment for both stocks and bonds was fueled by fresh data, pointing to lower inflation in a moderately growing U.S. economy.

The U.S. government released two price indexes early in the week, showing that inflation is easing nationwide.

The consumer price index (CPI), which measures retail or consumer-level inflation, remained steady in October, dropping to an annual rate of 3.2% from 3.7%, lagging market expectations.

Likewise, the producer price index (PPI), which measures inflation at the producer or wholesale level, dropped by 0.50% in October from September. It's also the most significant drop since April 2020 and lagging market expectations.

Then, retail spending, manufacturing and labor data were released. They confirmed that the U.S. economy continued to grow at a moderate pace.

For instance, a retail sales report showed that sales at the nation's retailers grew at an annual rate of 2.5%, more robust than the market expectations of 2.1%.

In addition, the NY Empire State Manufacturing Index rose 14 points to 9.1 in November 2023, the highest reading since last April and ahead of market forecasts of -2.8.

Meanwhile, the number of Americans filing for unemployment benefits jumped by 13,000 to 231,000 on Nov. 11. It's the highest three-month reading. Moreover, continuing claims rose by 18,000 to a two-year high of 1,865,000, indicating that the labor market is cooling off, easing pressure on wages and prices.

These data renewed hopes among traders and investors of a soft landing, an ideal situation for the nation's central bank, bonds and stocks.

"Equity markets were buoyed once again this week by news that the economy appears to be slowing," Rod Skyles, blogger with The Unconventional Economist, told International Business Times. "The Santa Claus rally has come early this year, driven by softening interest rates after the Fed decided in its November meeting not to raise rates, followed by dampened inflation, lower consumer spending and higher unemployment reports that have come out since. We are in a time when bad news is good for stocks, at least in the near term. "

Furthermore, Skyles thinks the decline in the Treasury bond yields is a positive for debt markets, as it allows debt investors to recover some of this year's losses.

"Still, bonds remain down significantly from their 2021 highs and have a long, long way to go to recover losses from the last 24 months," he added.

John Cunnison, CFA, a global strategy and financial policies expert serving as chief investment officer at Baker Boyer, sees volatility for stocks and bonds in the months ahead as data is released and interpreted.

"Investors will scrutinize every data point for its likely impact on the direction of interest rates over the short and long term, inflation trends, economic growth and potential for recession, and the likely impact of all these things on monetary policy decisions," he said.