Is the coast clear? Investing amid the rally

November is on track to be the best month of 2023. The too-hot U.S. economy is finally showing signs of cooling and seems to be taking the edge off for investors. So far this month, the S&P 500 is up almost 8%, bringing its year-to-date rally in touching distance of 20%. That rally has come as the yield surge loses steam. Ten-year Treasury yields have now dropped approximately 60 basis points from their intraday highs less than a month ago, and U.S. core bonds have now totally erased all of their 2023 losses.

So, is the coast clear?

It’s probably too soon to say, but there are a number of promising signs.

Here are 3 things last week that offered more confirmation.

1. The economy is cooling but not too much.

All the reads last week seemed to strike the balance of a soft landing. The U.S. consumer spent at a slower pace in October than it did over the summer, but still showed strong demand for all things e-commerce and electronics, restaurants and grocery stores, and health and personal care products. Earnings from retail giants like Target and Walmart echoed that cooling demand, but still managed to post beats. Also to that end, more Americans filed claims for unemployment in a sign that the super tight labor market is easing. Meanwhile, pockets of the economy that have been worse for wear over the last year, like manufacturing, showed signs of stabilizing.

2. Inflation is still coming down.

Last week’s read on the all-important Consumer Price Index (CPI) showed U.S. inflation cooled in October more than expected – across all measures. Headline prices didn’t increase at all over the month (+0.0% m/m), while core CPI (stripping out volatile food and energy prices) slowed its roll (+0.2% m/m). That brought the year-over-year figures to +3.2% for headline and +4.0% for core (a two-year low!).

Under the hood, signs were even more promising. Fed Chair Powell’s “super core” measure, which looks at sticky services prices most tied to the labor market, showed a big improvement (with its biggest monthly deceleration in a year). Elsewhere, goods deflation kept going (especially for used autos), and prices at the pump weren’t as painful (thanks to the latest decline in oil prices). Shelter prices, on the other hand, were still frustratingly stubborn, but the trend in lower rent prices for new leases continues to signal a cooldown will come.

Last week also brought the latest read on UK CPI. At 4.6%, headline inflation is now at its lowest in two years, and underlying pressures seem to be abating. In all, good news for the Bank of England, which brings us to our next point.

3. Central bank hikes look finished.

With last week’s data in hand, investors priced out all chances of further Fed rate hikes. Odds for a January hike fell to virtually 0% from 30% at the start of the week. Those probabilities are at or near 0% for the European Central Bank and the Bank of England, too. Is it mission accomplished? No, there’s still more progress to be made (core inflation at 4% is still double the Fed’s target), but it’s notable that things really seem to be moving along in right direction.

But we acknowledge there’s been a big rally. Have you missed it?

As we gear up for the final weeks of the year, we think the key is to stay focused and keep an eye on the big picture:

• Investing at highs hasn’t necessarily been a bad thing.

Stocks have rallied over 25% from their October 2022 lows. Now, there is some fear getting invested near the top of the market, even as we see a constructive backdrop ahead (as we noted the other week).

But history shows that after gains like these, forward-looking returns for both the short- and long-term investor have still been strong. Going back to 1980, after we’ve seen at least a 20% rally from the lows, stocks were higher about 16% on average a year later and positive 82% of the time. That rises to 100% of the time three years out, all while clipping about a 12% annualized return.

That’s to say, sitting on the sidelines as markets march higher can have big consequences, and means getting back in at even higher valuations.

• Don’t try to time it. 

We took a look at how missing the best days so far this year would have impacted returns. If you had invested in U.S. stocks and stayed fully invested, you’d be looking at a +19% return – well above the average +14% for calendar years over the last four decades. But if you missed just the 5 best days out of the 221 trading days so far, your return would be cut to 8%. Miss the best 10? Your return would be negative.

But how likely would it have been to miss the best days? The problem is that the best days tend to cluster around the worst days, when investors feel the most fearful and tempted to hit “sell”. In 2023, 8 of the 10 best days have occurred within two weeks of the 10 worst days.

It’s about time in the market, not timing the market.

• Bonds are still at a historically attractive entry point.

With the big decline in yields over the last few weeks, we mentioned that U.S. core bonds have now erased all of their 2023 losses. But yields are still hovering around their most elevated levels in the last decade, and even with the latest rally, the Bloomberg U.S. Aggregate Bond Index is still down about 15% from its all-time highs. In other words, this is still the biggest dip in core bonds that investors have had the opportunity to buy over the last 40+ years.

But while we believe bonds stand to offer better potential for income and diversification this cycle than the last one (which was defined by an era of ultra-low rates), yields may not stay as high as they are today forever. We know from the past that when the Fed finishes hiking, rates tend to fall pretty quickly. The last few weeks is case in point.

In all, we believe it’s a good time to be a multi-asset investor. With the final weeks of the year upon us, now is a good time to reflect. What is the purpose of your wealth? Does your portfolio reflect that? The things we want to do with money – our goals – are at the root of why we invest in the first place.

Your J.P. Morgan team is here to ensure your portfolio achieves the intent of your wealth.

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