The Federal Reserve and Seasonal Factors for the Holidays

We hope that our readers were able to enjoy a relaxing Thanksgiving holiday with their family and friends.  

The financial markets have been very eventful throughout this fall season. The stock and bond markets have been driven by the same themes that have dominated the past two years: inflation, the Federal Reserve’s response to inflation, and the impact on short-term and long-term interest rates. 

As indicated in the below chart: in periods where interest rates have risen dramatically over short periods of time, stock prices have suffered. When rates have fallen, markets have rallied.

Financial Market Recap

Through November 24^th, the S&P 500 Index had risen 20.5% – outpacing the small-cap Russell 2000 Index, which was up 4.0%. Internationally, the MSCI EAFE Index was up 12.1%. The 10-year U.S. Treasury Note was yielding 4.47%, and the Bloomberg Aggregate Bond Index was up a modest 0.5%. 

It is important to note that rising bond yields in the summer and fall caused U.S. stock markets to touch correction territory on October 27^th, prior to rallying strongly – as the 10-year U.S. Treasury yield began to fall after hitting 5%.

The rally in stocks and bonds in late October through Thanksgiving was caused by several news events that drove long-term rates lower. Perceived dovish Fed comments, following the November 1^st FOMC meeting, along with a slower-than-expected October employment report fueled the year’s strongest rally (vs other weeks). A lower-than-expected CPI report on November 14^th helped stocks and bonds rally further, as the markets indicate a belief that the Fed is likely done raising interest rates.

Upcoming Events

The most likely drivers of financial markets in December will continue to be inflation, the Federal Reserve, and interest rates. The November employment report will be released on December 8^th, followed by the November CPI on December 12^th. And the Federal Reserve will announce its interest rate decision on December 13^th. (It will be important to note any changes in wording or tone from Chairman Jerome Powell in his press conference that afternoon.)

In addition, several seasonal factors are likely to play out into year-end and early January. Individual investors are subject to the calendar year for their taxes, and they have the ability to control the year in which they take gains or losses in their portfolio. One can take tax losses this year and defer gains on winning positions into early January.

• Stocks that are down are more likely to remain under pressure through year’s end, as investors take tax losses on them in 2023.
• Conversely, stocks with gains are more likely to remain relatively strong through the end of the year, as investors with gains seek to defer them into the 2024 tax year.
• The two effects can reverse in early January, as investors realize deferred gains and buy back stocks that they’ve previously sold for tax losses.
• Portfolio managers also engage in “window dressing” to show winning stocks in their year-end portfolio report (and to eliminate their worst performing stocks), amplifying both effects.

A Special Note for the Holidays

I am looking forward to writing our year-end review and 2024 outlook, which should be released in early January. During the holiday season, where there are many in need in our country and around the world: I encourage you to consider others. My colleague Lauren Moone just authored an excellent piece about maximizing one’s philanthropic impact through various charitable giving strategies. 

As always, please reach out to your Farther advisor on any topic raised in this piece.

Lauren Moone, CFA, contributed to this piece.