Stocks just had their best month of the year. Why it happened and who led the way

Published Thu, Nov 30 20232:59 PM ESTUpdated Thu, Nov 30 20234:06 PM EST

Jesse Pound @/in/jesse-pound @jesserpound

A surprisingly strong year on Wall Street is gaining even more steam as 2024 gets closer. The S & P 500 gained nearly 9% in November for its best month since July 2022. It also breaks a three-month losing streak for the broad market index. The Dow Jones Industrial average hit a new high for 2023 and gained 8.8% for the month, its best month since October 2022. .SPX 1M mountain November is shaping up to be the best month of the year for the S & P 500. The rally in stocks has coincided with a rebound for bonds. The 10-year Treasury yield briefly broke above 5% in late October, but has since pulled back below 4.4%. Yields move opposite of price. The decline in bond yields comes as traders have become more certain that the Federal Reserve's rate hike cycle is over. The central bank kicked off the month by the leaving its benchmark rate unchanged for the second consecutive meeting. The options market is even pricing in multiple rate cuts next year, though that may be premature. "We recall that the correction that began at the end of July was initiated after market participants had begun to buy into the concept of 'higher for longer' interest rates. The rally that began since the end of October appears to be turbocharged by expectations that the Fed will cut rates as much as four times in 2024. In our view the Fed which so far has not wavered from its 2% inflation target is unlikely to begin cutting rates until sometime late in the fourth quarter of next year," John Stoltzfus, chief investment strategist at Oppenheimer, said in a Nov. 27 note to clients. US10Y 3M mountain The 10-year Treasury yield has retreated quickly from the 5% rate it hit in late October. Soft landing? One reason that traders are more confident that the Federal Reserve is done with rate cuts is that inflation has continued to cool. The latest example came on Thursday, when the core personal consumption expenditures price index for October showed a rise of 0.2% month over month and 3.5% for the year . Both of those measures were lower than in September. The PCE is the Fed's preferred inflation gauge. A negative reason for the Fed to cut rates would be if the U.S. falls into a recession. However, the most recent round of corporate earnings and economic data suggest that a soft landing is still possible. Through mid-November, when 94% of S & P 500 companies had reported results, third quarter earnings were tracking about 4.3% above the same time last year, according to FactSet. Guidance from management has been cautious, including from major retailers, but a strong start to the holiday shopping season in the days following Thanksgiving has cooled concerns about a sharp slowdown for the U.S. consumer. "Clearly, some data are moving the right direction, with inflation moderating faster than expected and also the economic data so far striking the right balance — not too hot, not too cold. So we are in this goldilocks type of environment, and you add on top of that the favorable seasonality, and you get a very strong November return," Angelo Kourkafas, senior investment strategist at Edward Jones, told CNBC. Top stocks Another important change in November is the stocks leading the way. After the so-called "Magnificent Seven" stocks have dominated the market for much of the year, none of those names appear in the top 10 performers in the S & P 500 this month. Instead the leaders as of Thursday morning are travel stocks like Expedia Group and Carnival Corp. , and varied names like Generac Holdings and Paramount Global . Names that would win if the economy can avoid a recession. Even shares of Insulet Corp. , which have struggled this year as new weight loss drugs cloud the future for diabetes treatments, rebounded more than 40% this month. "It's not just large caps, but mid-caps and small cap value have done well also in the past month, so it has been broad based. And that's encouraging, because if you look at that megacap tech space, it's been getting pretty rich," Yung-Yu Ma, chief investment officer at BMO Wealth Management, told CNBC. That's not to say that the big tech names are struggling. Of the 10 biggest stocks in the S & P 500, five rose at least 10% in November, including the two largest in Apple and Microsoft . Shares of Tesla rose more than 21%. Energy stocks were the rare weak spot in the market, though uncertainty around the next move for OPEC+ has created a volatile market environment for oil prices. To be sure, one risk of such a strong November is that the move in stocks proves to be a pull-forward of the so-called "Santa Clause rally" that often comes near the end of the year. However, historical data says the rally can keep going. "Among the frequent client questions on the road this week was whether a very strong November historically steals performance from the typical December Santa Claus rally. We dusted off some old data and dug into this last night – the punchline… not really. There is a clear bias that very weak Novembers have been followed up with a strong December showing, but aside from that, there's very little difference in the remaining 90% of the data," Strategas strategist Chris Verrone said in a note to clients Thursday. — CNBC's Michael Bloom contributed reporting.