November ended with a bang!
Last Wednesday, the final trading day of the month, the S&P 500 soared more than 3% and the Dow rose 2.3%. Overall gains for November were 5.4% and 5.7%, respectively.
Personally, I wasn’t too surprised to see the major indices turn and surge on Wednesday – we finally got what we were waiting for: The Federal Reserve ignited a rally with its more dovish comments.
In Fed Chairman Jerome Powell’s speech at the Brookings Institute last Wednesday, he stated, “The time for moderating the pace of rate increases may come as soon as the December meeting.”
Powell continued that the Fed would not raise key interest rates again by 0.75% in December – signaling that a smaller 0.5% hike was more likely.
While inflation still remains a risk to the U.S. economy, Powell thinks a smaller rate hike could help mitigate these risks.
As such, moderating inflation and slowing rate hikes should certainly help spread a little holiday cheer on Wall Street this December.
But as I mentioned in Tuesday’s Market 360, this December is off to a bit of a rough start.
In today’s Market 360, we’re going to talk about why the market is setting up for gains as we close out the year and I’ll share how you can best prepare your portfolio as we head into 2023…
My Eyes Are on Next Week
As I said Tuesday, I think the early December pullback could eventually serve as a launching pad for stocks this month. The fact is that December is one of the seasonally strongest months of the year.
We’re also in a very interesting market environment right now.
The 10-year Treasury yield is at about 3.5% today, which is a dramatic decline from 4.2% in early November. This decline signals the market anticipates that both inflation and the economy are cooling down.
We’ll know more about inflation in the coming days. November’s Producer Price Index (PPI) numbers will be released tomorrow – which will give us some insight in wholesale inflation. Then the Consumer Price Index (CPI) reading will be out next Tuesday, followed by the Federal Open Market Committee (FOMC) statement Wednesday.
I expect both PPI and CPI numbers to show that inflation is going down. If that plays out, as a result, we can expect more dovish comments in the December FOMC statement next week.
Furthermore, the Institute of Supply Management (ISM) recently announced that its manufacturing index declined to 49 in November, down from 50.2 in October. Since any reading over 50 signals an expansion, the ISM manufacturing index ended 30-straight months of expansion from the U.S. manufacturing center. The New Orders component slipped to 47.2 in November (down from 49.2 in October) and the Backlog of Orders plunged to 40 in November (down from 45.3 in October).
If the Fed was looking for a reason to stop raising key interest rates after its December FOMC meeting, the ISM Manufacturing report is the best reason so far!
End of the Year Rally – Here’s How to Prepare
As soon as the Fed signals that it will stop raising key interest rates, and if the FOMC statement is interpreted as dovish, a tremendous yearend rally could be in the cards.
Although the Fed has telegraphed that it may continue to raise key interest rates in 2023, in the wake of weak consumer confidence as well as a horrible ISM manufacturing report, the FOMC should pause.
And right now, some of my Breakthrough Stocks Buy List companies are poised to soar as this rally takes hold.
Price to earnings (PE) ratios for my Breakthrough Stocks Buy List have been compressed to only 8.4 times median trailing earnings and 3.1 times median forecasted 2023 earnings. I have to say that I have never witnessed such low PE ratios for our powerful growth stocks.
I should also add that my Breakthrough Stocks are forecasted to post 27.7% average annual revenue growth and a whopping 415.9% average annual earnings growth.
The uncertainty surrounding the stock market, interest rates, inflation and the Fed is starting to diminish. There are still some wildcards out there, such as how will Russia respond to the G7’s $60 per barrel price cap on crude oil and whether or not there will be a ceasefire in Ukraine.
However, in the interim, the best defense remains a strong offense of fundamentally superior Breakthrough Stocks!
Tomorrow, I will publish the final Breakthrough Stocks Monthly Issue of 2023, including two new recommendations and my Top 5 Stocks list.