Give some credit to the brilliant minds at Major League Baseball, who found a way to keep America’s pastime relevant even in the depths of winter: Last week Shohei Otani signed a 10-year contract with the Los Angeles Dodgers worth $700 million. That’s reportedly the biggest contract in North American sports history, eclipsing the $450 million deal that Kansas City Chiefs’ quarterback and perennial MVP Patrick Mahomes signed in 2020 following a Super Bowl victory.¹ 

That got me thinking: How much richer would Otani have been if he had put that dough into the market ahead of last Wednesday’s decision on rates by the Federal Reserve? The answer: A lot. 

Of course, baseball contracts don’t work like that: Otani won’t get the cash up front, and there are a lot of if’s-, and’s- and but’s between $0 and $700 million. And markets don’t work that way, either.

Last week’s “everything rally” naturally sent stock prices higher, but the optimism also extended to bonds in almost as dramatic a fashion, allowing a balanced strategy combining stocks and bonds to nearly keep pace with a far riskier, stocks-only portfolio. In fact, the broadening out of capital market returns swept up big stocks, small stocks, growth, value, domestic, international, gold, energy, bonds – pretty much everything except crypto and short-term U.S. Treasuries. If you were invested anywhere last week, it was pretty hard to miss.

Let’s be clear, though: The gains weren’t really huge (last week was only the sixth-best week for the S&P 500 Index, for example, and only the 11^th best so far for the NASDAQ). But if anything, that relative moderation should feel somewhat reassuring because it suggests that markets were appropriately upbeat, but not necessarily euphoric.

Also reassuring was the fact that the place where last week’s returns tended to be the largest were also categories where year-to-date gains have tended to be among the weakest. Small- and mid-cap stocks, for example, easily outperformed large-caps on their way to what ultimately proved to be nearly their best performances of the year. Ditto for large-cap value stocks (which have famously underperformed large growth stocks all year) and core U.S. bonds, where some of the biggest week-over-week declines in 2- and 10-year yields inked all year helped the Bloomberg U.S. Aggregate index to a 2.16% advance – its best weekly performance so far in 2023.

One possible way to interpret this big broadening out of capital market optimism is that investors are all-in on the “soft-landing” theme. They’ve considered it all year, but until now have been somewhat hesitant to fully embrace bonds and smaller, more economically sensitive stocks – a sign that although they believed the soft-landing concept, they were still at least somewhat skeptical of it. But if last week’s widening out was for real, it could signal that the cautious optimism that kept this year’s gains so narrowly focused on big growth stocks has finally given way to a stronger conviction that all corners of the market are bound to benefit when three things happen simultaneously next year: 

• One, that inflation will continue its downward trajectory 

• Two, that interest rates will fall next year at the behest of the Fed 

• Three, that the economy will completely side-step a damaging downturn and the big acceleration in joblessness that would naturally accompany it

Behind the scenes of all this was of course the Fed’s pivot – more specifically, Jerome Powell’s pivot – away from a cautionary tone to something far more market-positive. That came not just in the form of a third consecutive pause in the Fed’s rate-tightening campaign (which was hardly surprising), but also in Powell’s failure to push back on the assumption – by both markets and the Fed officials – that the Fed is destined to take rates lower as early as next May. 

That, to me, was surprising. (Shocking, even.) Scarcely two questions into Wednesday’s post-decision Q&A, Powell was served up a hanging curveball when he was asked whether other Fed officials’ recent comments that conditions were becoming more amenable to rate cuts were premature. Powell’s response? It’s not my job to put words in the mouths of fellow Fed governors, and besides, “we’re seeing progress” on the inflation front, so why not enjoy it?²

Short of signing his name to the dot-plot and handing out autographed copies to the press, it’s hard to imagine a more explicit endorsement of the “we did it!” sentiment that seems to be circulating at the Fed and elsewhere. Markets loved it: you could almost hear everyone hold their breath while Powell answered the question. Then, when it was clear that he wasn’t in the mood to disagree with the market, equity markets resumed their march higher. Absent from Wednesday’s action, then, was the recent tendency of markets to advance on the decision.

Meanwhile, the economy continues to do its own thing. Two data points that seemed to endorse the positivity theme were nominal retail sales (which advanced another 0.3% in November despite a big drop in gas station sales as gasoline prices continued to drop3) and weekly jobless claims, which nearly fell back below the 200,000 level.⁴  

Still, manufacturing resumed its slide. Despite the return of striking autoworkers, Friday’s flash PMI for manufacturing dipped back below the 50-yard line that separates growth from contraction.⁵ At the same time, the New York Fed’s read on goods-producing businesses in its region of operations included data that showed new orders continuing to drop and backlogs plunging to their lowest levels in years.⁶

So if you look hard enough, there are still plenty of reasons for intelligent, inquiring minds to rationally disagree about the direction of the economy. And I find myself forced to admit that even though I remain stubbornly skeptical about a soft landing, I’m becoming increasingly unsure about what happens next.

What to watch this week

This week will mark the beginning of the holiday lull. While I suppose it’s always possible that this week’s economic data might generate a lasting impact on market sentiment, many economists have already mostly closed the book on 2023 and will wait until January 2 to start passing judgment on 2024. 

Of course the other, less comfortable side of that lull is that small moves based on unexpected developments can become exaggerated when trading volumes are thin, as they often are this time of year.

Meanwhile, much of the data on tap for the remainder of the year reflects largely on areas where the books are mostly settled. Case in point: housing. This week’s data includes homebuilder sentiment (Monday), housing starts and permits (Tuesday), and new home sales (Friday). While the recent softening of Fed resolve has allowed mortgage rates to ease somewhat – and therefore allowed housing market data to improve at the margin – there’s still a long way to go before the housing engine restarts and once again begins powering the economy forward. Hopefully that’s a story for 2024, but we’ll see. 

Next up on the list of mostly knowns is consumer sentiment. Falling gasoline prices finally seemed to have finally generated the expected impact on sentiment figures two weeks ago, as the University of Michigan’s mid-month update showed. This week we’ll get the final update on the UofM’s index, as well as the Conference Board’s take. I still expect that the U.S. consumer will buckle at some point amid the various pressures building against it, but when? Friday’s income and outlays report could shed some light.

In terms of the real economy, Thursday’s release of the Conference Board’s index of leading economic indicators, which has been sending recessionary signals pretty much throughout 2023, will get its final spotlight of the year on Thursday. We’ll also be treated to several reads on the health of U.S. manufacturing, which has been just as weak for just as long. On Thursday we’ll get the Philly Fed’s regional manufacturing index while Friday will bring November’s data on durable goods orders. These, too, feel like old news: All year, manufacturing data have been suggesting that a downturn is near, but nothing substantial enough to bring down the whole economy has yet materialized. Just like the consumer data mentioned above, the data will have to break in one direction or another at some point – but I doubt this is the week it will happen. 

Finally, one dark-horse candidate for attention is Tuesday afternoon’s treasury international capital (or TIC) data, which show securities trading volumes across international borders and might become increasingly interesting as market momentum waxes and wanes. Last week, one thoughtful reader forwarded a question regarding where all the capital for a sustained rally is coming from. After some digging, one of the few possible sources that emerged was foreign demand for U.S. securities, which has remained more or less stable. If markets are to remain upbeat in 2024, the TIC release may help explain why.

[1] https://www.bls.gov/news.release/jolts.a.htm

[2] https://www.bls.gov/news.release/empsit.nr0.htm

[3] https://www.challengergray.com/blog/job-cuts-jump-in-november-2023-from-october-second-time-this-year-cuts-lower-than-same-month-year-ago/

[4] https://adpemploymentreport.com/

[5] Ibid.

[6] Ibid.

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