The Market is Turning and for Good Reason (with one caveat)

November 17, 2023

Lower 10-Year Interest Rates Are Driving the Stock Rally

The decline in the 10-year rate has been fueled in part by the Fed meeting on November 1 where Fed Chairman Jerome Powell announced he was not raising the overnight interest rate. He further cheered the market by indicating he did not expect much in the way of rate increases in the future.

That news was followed by a job creation report that showed the US gaining jobs, but not too many to fuel inflation, which further boosted the rally. Finally, earlier this week, inflation figures were announced showing inflation declining more than expected, again pushing up stocks.

We Expected a Decline in Inflation Earlier and Will Likely See a Further Decline

We have been expecting inflation to decline for the last year now – and it has. We suspected earlier that much of the increase in inflation was due to Covid Crisis created supply and demand-based price increases in various parts of the economy. Hence, once those supply/demand issues became more balanced as the Covid Crisis passed, inflation would decline.

However, we feel that the supply and demand-based price increases have kicked off some longer-term inflation that the Fed will likely be watchful of for some years to come. That is one reason we don’t expect a big decline in interest rates.

Eventually we expect monetary inflation to increase as the Fed is forced to print more money to fund the enormous borrowing demands of Congress. But for now, inflation will remain relatively muted. In fact, it’s worth noting that Wednesday, the Producer Price Inflation index showed a ½% decline in inflation from last month to an annual rate of 1.3%. Since consumer inflation tends to follow producer inflation, it’s a good bet that we will see consumer inflation declining over the next couple months as well.

Interest Rates are Everything

Lower interest rates are a very good reason for the stock market to turn up. It has been the primary driving force for the market for almost two years. Hence, we see this as a lasting rally so long as the 10-year rate does not go up too much. All the stock market needs now is for rates to remain relatively stable and it will continue its 2023 rally.

No Recession Has Hit that Would Hurt Stocks, as Many Wrongly Predicted it Would, and We Still Don’t See a Recession Coming

What so many market analysts and economists fail to see is the amount of stimulus the US Congress is pouring into the economy right now. We suspect they don’t want to see it because it is prima facie evidence that we are in the midst of a massive bubble economy. That’s something that even the biggest bears don’t seem to want to admit.

So, they keep expecting a recession partly because of higher interest rates and partly because they see a declining impact from Covid stimulus. However, they don’t seem to see the incredible increase in post-covid stimulus that Congress has approved.

Last year Congress DOUBLED our annual borrowing from $1 trillion to $2 trillion. This year, they will likely increase borrowing by another $300 billion (or more) to $2.3 trillion. We are nearing at the all-time peak of stimulus that we hit in the Covid Crisis! All terrible in the long term – all a big plus in the short term.

The Caveat

Although it is great to see that the 10-year interest rate has stopped climbing and has declined a bit, there is still a big potential underlying problem for stocks and bonds. The Fed is selling bonds – lots of them. The Fed has been selling about $100 billion of bonds per month this year and that selling did not slow down at all in October.

Until the Fed stops selling bonds, there will be upward pressure on the 10-year interest rate, which is a clear negative for stocks. We expect the Fed to eventually stop selling, but we can’t say exactly when that will occur. We are sure the Fed doesn’t know either. So, we will keep an eye out and keep you up to date on what we see and what that means for the stock market.

We Expected This Rally to Happen and Are Pleased We Did Not Issue Any Calls to Sell during the Big Correction and for Bull Bear Investors to Hold Stocks

We are big bears long term, but we are Bull Bears, not dumb bears. We recognize the power of government to support markets and we fully intend to make money on that support until it no longer works.

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