Legendary investor Charlie Munger died Tuesday at the age of 99. As vice chairman of Berkshire Hathaway (NYSE: BRK.A, BRK.B), Munger played Tom Hagen to Warren Buffett’s Don Corleone.

Munger also was renowned for his acerbic wit. He once said: “People have always had this craving to have someone tell them the future. Long ago, kings would hire people to read sheep guts. There’s always been a market for people who pretend to know the future.”

I can’t pretend to know the future behavior of the stock market, but I can interpret technical and fundamental conditions to determine what’s likely to happen. Right now, underlying conditions favor a continuation of the current stock market rally.

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The bears are the dumb money. If you get too defensive in the latter part of 2023, you’ll leave money on the table.

Let’s start with strong economic growth. The revision to third-quarter U.S. gross domestic product (GDP) released on Wednesday revealed robust growth of 5.2%, surpassing the initial reading of 4.9%. At the same time, headline inflation has been moving closer to the Federal Reserve’s target of 2%.

As November draws to a close, the S&P 500 is poised to mark an impressive monthly gain, surging over 10% since late October.

Simultaneously, the NASDAQ has outperformed, experiencing a 12% increase fueled by the rally in growth and technology stocks, which found relief amid a temporary slowdown in rising interest rates. The artificial intelligence (AI) mania took a breather in October but it has regained vigor in recent weeks. Tech stocks are back in vogue again.

While the stock market’s rally during November has captured attention, an equally compelling narrative has unfolded in the bond market. The 10-year U.S. Treasury yield has dipped below 4.3%, reaching a level not observed since September. The significant decline of this benchmark bond yield has been manna from heaven for the stock market.

Since their peak in October, these yields have declined by more than 70 basis points (0.70%). Two-year yields have followed suit, falling below 4.7% after reaching 5.2% the previous month. This decline is indicative of a growing consensus that the Federal Reserve’s next move in 2024 may involve a rate cut.

Remarks from Federal Reserve Governor Christopher Waller on Tuesday further fueled optimism in this direction. Waller suggested that maintaining the current policy rate might not be warranted if inflation continues to recede.

That said, it’s crucial to temper optimism about the timing of a potential Fed rate cut. Despite continued moderation in inflation, it will likely be well into 2024 before the Fed gathers sufficient evidence to consider easing its currently restrictive policy.

Sector rotation…

In November, sectors such as technology, consumer discretionary, real estate, and communication services have emerged as the frontrunners, each witnessing gains exceeding 10%. The decline in yields played a pivotal role in propelling these sectors forward, given their sensitivity to long-term interest rates. In contrast, the energy sector stood as the sole laggard for the month, with defensive sectors such as staples, health care, and utilities posting more modest gains.

Technology and communication services stocks have surged by over 50% in November, followed closely by the consumer discretionary sector with a gain exceeding 33%. On the flip side, defensive sectors continue to lag, with utilities, health care, energy, and consumer staples all experiencing declines exceeding 4% for the year.

That said, the New York Stock Exchange Advance/Decline line (NYAD) has been rising, an indication of healthy market breadth (see chart, with data as of market close Thursday):

A rising NYAD indicates there is broad-based strength in the market, because a larger number of stocks are participating in the upward movement. The trend signals a healthy market where a significant portion of stocks is experiencing positive momentum.

For the underdogs in the market, including bond proxies, small-caps, and value-style investments, there’s an opportunity to catch up as the headwind of rising yields subsides.

More fuel for the stock rally arrived Thursday, when the Commerce Department reported that the “core” personal consumption expenditures (PCE) price index, excluding food and energy prices, rose 0.2% for the month and 3.5% on a year-over-year basis. Both numbers aligned with consensus estimates. Personal income and spending both rose 0.2% on the month, also in line with estimates.

The main U.S. stock market indices closed mostly higher on Thursday, as follows:

• DJIA: +1.47%
• S&P 500: +0.38%
• NASDAQ: -0.23%
• Russell 2000: +0.29%

The CBOE Volatility Index (VIX) dipped below 13, a clear sign that market fear is dissipating.

The end is nigh…

Tightening is coming to an end. Current market expectations for the path of the fed funds rate, according to scheduled Federal Open Market Committee (FOMC) meetings, is for a series of pauses and then a 0.25% cut in May 2024 to 5.00%-5.25%.

Which brings me to utilities stocks. 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 mid-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.

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