In the wake of the Federal Reserve’s latest decision to stand pat on the federal funds rate and the unveiling of “Goldilocks” economic data, stocks have regained their mojo.

As I explain below, the main driver of recent gains in equities is the consensus conviction that we’re approaching “peak rates.” I also steer you toward an investment class that should disproportionately benefit from a Fed pivot on monetary policy.

That said, the last few weeks have been a roller coaster ride for investors. Despite the upward trajectory of stocks in recent days, volatility is likely to continue.

The next consumer price index (CPI) report is due November 14. If CPI inflation comes in unexpectedly hot, it could prompt the Fed to tighten at its next policy meeting December 12-13. However, the latest reading of the CME Group’s FedWatch tool puts the odds of another pause at 85%.

Stirring apprehension on Wall Street is the looming November 17 deadline for the federal government to finalize a funding bill to avert a potential government shutdown.

In these recurring budget battles, Congress has a history of brinkmanship followed by last-minute deals. However, the far-right insurgency in the GOP-controlled House takes no prisoners and would be content to shut down the government.

Just ask Rep. Kevin McCarthy (R-CA), who was not only ousted from the House speakership for making a budget deal last time around with Democrats, but who now faces a primary challenge from a MAGA firebrand. As budget negotiations get under way, you can hear the tumbrels getting wheeled into place. A shutdown would be disastrous for the economy and markets.

Bond yields in retreat…

The major driver of stock market gains lately has been the retreat of bond yields, as the end of the Fed’s tightening cycle comes into sight. The benchmark 10-year U.S. Treasury yield (TNX) has fallen well below the worrisome threshold of 5%, reflecting optimism that inflation will continue to cool and the Fed will stay on the sidelines (see the following chart):

Recent jobs and economic data point to an economy that’s on track but not growing at an inflationary pace. This balancing act is a rare feat for which, in my view, policymakers aren’t getting sufficient credit. However, in our “anger-tainment” culture, votes and ratings are garnered by incessant indignance.

You wouldn’t know it from the bleating of the gloomsters, but economic and financial conditions are pretty darn good, especially in light of the recent pandemic and the continuing wars in the Middle East and Eastern Europe.

Projections for holiday shopping are auspicious. The National Retail Federation (NRF) reported on November 2 that shoppers are expected to spend a record amount of money this holiday season. According to the NRF, sales in November and December should rise by 3% to 4% on a year-over-year basis, to between $957.3 billion and $966.6 billion.

How important is holiday spending? About three-quarters of U.S. gross domestic product is comprised by consumer spending, and in turn, about three-quarters of consumer spending occurs during the Thanksgiving-Christmas time frame. This year’s holiday shopping spree should lift the American economy. (Armed with our VISA card, my wife every holiday season performs her patriotic duty.)

Q3 report cards deliver decent grades…

The curtain is falling on a solid earnings season, with the majority of S&P 500 companies having disclosed their third-quarter operating results. This earnings season, though not exceptional, supports the bull case despite a slightly softer macroeconomic environment.

Among the 80% of reporting companies, revenue growth has nudged just above the 2% mark, while profits have posted an almost 4% rise compared to the preceding year, according to research firm FactSet.

While earnings growth remains somewhat modest, this quarter marks the first instance of year-over-year expansion since the third quarter of 2022. The resilience of corporate earnings speaks to sustained consumer demand and companies’ adept handling of expenses, particularly labor costs.

Greater corporate efficiency has mitigated the effects of inflation, translating into an uptick in profit margins from the previous quarter. The prospect of a cooling economy may cast a shadow on earnings growth in the forthcoming quarters. However, economic deceleration is unlikely to spawn a harsh profit decline.

The prevailing consensus calls for double-digit earnings growth in 2024. Any downward adjustments to a more conservative pace might temporarily weigh on stock markets, but such fluctuations probably won’t derail the broader bullish trend.

Stocks sharply rallied last week and expanded their gains Monday. The interest rate-sensitive tech sector is getting a big lift from the prospect of peak rates.

On Tuesday, the main U.S. stock market indices closed mostly higher, as follows:

• DJIA: +0.17%
• S&P 500: +0.28%
• NASDAQ: +0.90%
• Russell: -0.28%

The tech-heavy NASDAQ on Tuesday posted eight straight days of gains for the first time since an 11-day winning streak ended in November 2021. Both the Dow Jones Industrial Average and the S&P 500 rose for a seventh straight session.

The CBOE Volatility Index (VIX) fell about -0.60% to hover at 14.80, and bond yields slipped further as well. It’s beginning to look a lot like Christmas.

WATCH THIS VIDEO: Is The Tide Turning for Stocks?

Don’t get me wrong. I don’t think we’ve seen the last of interest-rate fears spooking investors, and it won’t be smooth sailing as we head into 2024.

However, I continue to assert that the recent market correction represented a compelling buying opportunity, not the start of a far worse decline.

As I’ve noted above, a major factor driving stock market gains right now is the collective feeling on Wall Street that we’ve witnessed peak interest rates.

Which brings me to the utilities sector.

Among the publications that I edit is our premium trading service Utility Forecaster. My colleague Robert Rapier is the chief investment strategist.

As you position your portfolio for next year, turn to utilities stocks. The utilities sector has gotten clobbered lately by rising interest rates, but it’s poised to rebound when the Fed pivots in 2024. That means value plays are ready for the picking.

However, you need to pick the right ones. For our list of the highest-quality utilities stocks, click here now.

John Persinos is the editorial director of Investing Daily.

To subscribe to John’s video channel, click this icon: