Investors were treated with good news on a variety of fronts as October closed and we enter the November-December seasonal period. Both the U.S. Treasury and the Federal Reserve Bank should be credited with most of the positive developments that sent bond prices higher and yields lower.

 

Since September, I was convinced that if bond yields continued to rise, stocks would fall. Last week, however, I advised investors that we were nearing the end of this trend, and "I expect a rebound to begin in November if not sooner."

 

To me, the most important development was the decision by the U.S. Treasury to slow the pace of increases in longer-dated debt auctions in the November 2023 to January 2024 period. The Treasury also expects it will need only one more additional quarter of increases after this to attain its financing needs. They also cut their borrowing estimate for the fourth quarter by $76 billion to $776 billion.

 

Now, while this is still a lot of money it is less than bond investors and the markets overall expected. It also means that by auctioning more shorter-term bills, liquidity in the financial markets increases and that is good for financial assets like stocks and long-term bonds. The result was a drop in long-term yields and a rally in the U.S. 10-year and 30-year bonds. And as I have said, lower yields on the long end immediately trigger a run-up in equities. That was on Nov. 1.

 

The next day, on Wednesday, Nov. 2, the Federal Open Market Committee decided to hold interest rates where they are. That was the second month in a row that the Fed has kept its monetary policy of further tightening on hold. That was no surprise to the markets since the inflation data seems to be under control at least for now.

 

However, the Fed was still holding out the possibility that they could raise again in December if the data warranted it. Chairman Jerome Powell, in his Q&A session after the announcement, maintained the line that they would remain data dependent, but to most observers he appeared less hawkish, if not downright "dovish" in his answers.

 

Traders took this to mean that the raising of interest rates that has been a daily diet for the markets over the last 18 months may be over. That still leaves the Fed's quantitative tightening program (QT) in place. Between the rise in long-term yields over the last few months and QT, it could be that the Fed feels they no longer need further hikes in the Fed funds rate to achieve their inflation objectives. In any case, both bonds and stocks spiked higher since Wednesday.

 

The October U.S. non-farm payroll data also cheered investors. The economy only added 150,000 jobs, as unemployment ticked up to 3.9 percent from 3.8 percent. The unemployment rate now stands at its highest level since January 2022. Remember that negative news on the economy means good news for investors, since the Fed will likely hold off on tightening as the economy slows. Bond yields dropped further as bonds on the long end soared as traders were forced to cover their shorts by buying back U.S. Treasuries.

 

 Many Fed watchers now believe that the U.S. Treasury and its secretary, Janet Yellen, maybe replacing the Fed as the markets' focal point for determining the future path of interest rates. Instead of parsing every word of FOMC members for clues on the Fed's next move in taming inflation, the Treasury's auction plans have taken center stage. That could have some interesting implications for the future of the stock market.

 

Unlike the Fed, Yellen is a politician as a member of the Biden administration's cabinet, which is entering a presidential election in 2024. The stock and bond markets are an integral part of any candidate's election prospects. Putting the two together, we may see the U.S. Treasury pull some rabbits out of the hat that could stack the economic odds for a favorable outcome.

 

Marketwise, we got down to 4,103 last Friday, three points from my target, and have been climbing ever since. The S&P 500 Index has retraced almost 50 percent of the entire three-month decline in six days! 

 

It was a testament to the bullish sentiment that Apple's disappointing earnings, which would have decimated the stock price and pulled the stock market down with it a week ago, has had little impact. A pullback and consolidation would make sense to me after this run and then up again. 

 

We are in a seasonably strong period in the markets (November-December) with bond yields dropping and equities hopping. What could be better than that?

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.