Stocks rose for the week even as inflation came in hotter than expected and interest rates jumped. On Tuesday, the October consumer price index showed prices rising 0.4% from September, and 0.3% when volatile food and energy costs are left out. Both readings were above forecasts. Hotter inflation makes it more likely that the Federal Reserve raises interest rates to slow price growth. Traders in interest-rate futures see a Federal Reserve rate increase at the December 9 meeting as fully priced in, and they put the odds of a larger, half-point increase at roughly 12% to 15%, after Fed Governor Christopher Waller said a third straight monthly core reading of 0.3% or more would put a half-point move up for discussion. Tuesday's $42 billion auction of 10-year Treasury notes drew weaker demand than usual. Investors required a yield of 5.02% to buy the notes, and for every dollar the government sought, bidders offered $2.46, below $2.77 at October's auction and an average of $2.60. Dealers, the large banks that must step in when other buyers hold back, ended up with about 9.8% of the notes, a sign that demand was soft.
Friday's producer price index, a measure of the prices businesses receive for what they sell, rose 0.3% from the month before. That was slightly below the 0.4% economists expected, but the annual rate reached 6.5%, the highest since 2022, and expectations for a December rate increase held. Short-term interest rates rose the most, because they tend to follow what investors expect the Fed to do. The 2-year Treasury yield ended the week at 4.88%, up 0.37 percentage points, the 10-year at 5.15%, up 0.29 percentage points, and the 30-year at 5.47%, up 0.21 percentage points. Because short-term rates rose faster than long-term rates, the gap between them narrowed. Bonds gave no cushion this week: the Bloomberg US Aggregate bond index fell 1.50% for the week. The U.S. dollar had its best week in about two months as rate-hike expectations rose. A stronger dollar tends to weigh on commodity prices, which are priced in dollars.
Stocks looked past the repricing. For the week, the S&P 500 rose 2.54% and the Nasdaq, which is weighted toward technology companies, rose 2.28%, while the Dow, which tracks 30 large companies, gained 2.57%. Small-cap stocks added 1.36%, as measured by the Russell 2000, and international stocks did nearly as well, with the MSCI ACWI Ex-USA index up 2.26%. The equal-weighted S&P 500, which gives every company the same weight regardless of size, gained about 3%, a little more than the standard index, so the advance reached beyond the largest companies. One large company moved against the market. On Monday, Nvidia, a leading maker of chips used for artificial intelligence, fell about 4% even as the Nasdaq rallied, a reminder of how much of the market rides on a few very large names. The VIX, a gauge of expected stock market swings, ended the week at 19.30, down from 25.64 a week earlier.
Inflation and the Fed stay in focus this week. On Monday, November 16, the New York Fed's Empire State manufacturing survey gives an early read on business activity, and Fed Chair Kevin Warsh speaks at noon Eastern. After last week's inflation reports, investors will listen for any sign of how quickly the Fed intends to move at its December 9 meeting. Tuesday brings October retail sales, which show how willing consumers are to keep spending when prices are rising, along with industrial production, a measure of factory, mining and utility output, and ADP's weekly private payrolls estimate. Pending home sales follow on Wednesday and show how the housing market is holding up. Wednesday also brings the minutes of the Fed's late-October meeting, which can show how divided officials were about raising rates. On Thursday, the weekly jobless claims report offers a read on the job market, and an auction of 10-year inflation-protected Treasury notes shows how much investors want protection against rising prices. The week ends Friday with the University of Michigan's consumer sentiment survey, which includes what households expect for inflation.
The week's inflation reports were a reminder that the path of interest rates still drives markets. Stocks held up, but the bond market had a harder week, with both short- and long-term yields moving sharply higher. That matters for portfolios because bonds are usually expected to soften the ups and downs of stocks. When investors worry about inflation and rate increases at the same time, bonds can fall even when stocks hold up, as they did this week, and at times both can fall together. We think this is a reason to keep expectations for bonds realistic and to pay attention to how long a bond's maturity is, since bond prices generally fall when interest rates rise, and longer-term bonds generally fall more. It is also a reason to keep the sources of return in a portfolio varied rather than leaning on any single one.
The rise in stocks was broader than the headline index suggests, with the average company in the S&P 500 doing slightly better than the index as a whole. We see that as a healthy sign after a period when a few large technology companies drove most of the market's moves. It does not remove the risks. Prices are still sensitive to inflation news, and the VIX at 19.30, though well below 25.64 a week earlier, shows investors remain cautious. In general terms, our posture remains cautious: we have leaned toward more defensive, lower-volatility stock holdings, relied less on the largest growth companies, and held high-quality bonds, including longer-term U.S. Treasuries. These choices carry risk. Higher-quality stocks can still decline, bonds are subject to interest rate, credit and inflation risk, and portfolios may lag if the largest technology stocks lead the market again. Individual accounts vary with each client's plan and instructions, and diversification does not ensure a profit or protect against loss.
We remain diversified across market capitalizations, sectors, and geographies, with an emphasis on higher-quality companies we believe may hold up better when markets turn volatile, though they can still decline. Many factors can change the outlook, and we will keep reviewing our positioning as the data changes. This week's retail sales report and the Fed Chair's remarks are the next tests for the inflation story. We believe a disciplined approach, rather than reacting to a single week's headlines, is a sound way to approach a period like this one.
If you have any questions about the above, please reach out to us to set up a one-to-one meeting so we can review your situation.
Sincerely,
President
SBC Investment Management
P: (602) 641-5996 · M: (319) 520-2033 · E: bandrus@sbcinvestmentmanagement.com
Investment Analyst, Junior Portfolio Manager
SBC Investment Management
P: (435) 775-2950 · M: (435) 590-8317 · E: jrehkop@sbcinvestmentmanagement.com