U.S. stocks logged a fourth straight week of gains last week amid light trading activity around Thanksgiving. For the week, the S&P 500 climbed 1.0% and the Dow Jones and Nasdaq Composite returned 1.3% and 0.9%, respectively. Each of the major indices is on pace for the best monthly performance of the year following the market sell-off from late July through October. The risk-on rally has been supported by the strongest inflows to equities since February of 2022 as global stocks received $40 billion in net inflows over the past 2 weeks, according to a Bank of America report analyzing EPFR Global data. Additionally, bonds are also seeing strong inflows as the same report noted that corporate bonds received over $16 billion of net inflows over the month ending November 20th, which is more than any full month since July 2020.

The catalyst for the sharp reversal in investor sentiment that has pulled cash off the sidelines has largely been attributed to growing market conviction that the Fed is done hiking interest rates and will even start to reverse course next year after several months of encouraging inflation data showing continued price growth moderation. In fact, fixed income markets now price in nearly 1% of rate cuts over the next year with the Fed funds rate expected to end 2024 below 4.5%, according to Bloomberg. However, expectations for a smooth gradual rate reduction, which is a crucial component to maintaining market momentum, are reliant on inflation being sustainably restored to the Fed’s 2% target while economic growth data remains resilient. Upside surprises in inflation would drive those rate expectations higher for longer, while an economic downturn on the other hand could lead to much sharper rate cuts than forecast. For reference, the Fed’s preferred inflation gauge of core PCE is expected to come in at 3.5% year-over-year for October later this week.

Regarding economic resilience, the U.S. consumer has been a key pillar of support that will be under high investor scrutiny looking out to next year. Last week’s Black Friday retail sales data was yet another indicator of positive but slowing spending growth as consumers gradually turn more price-conscious after absorbing high price increases the last few years. According to the Mastercard SpendingPulse report, U.S. retail sales on Black Friday grew 2.5% year-over-year to a new record high with e-commerce sales providing strong support growing 8.5% compared to a year ago. However, there was also a high amount of promotional activity and a notable rise in buy now/pay later purchases, which was consistent with cautious consumer commentary from multiple retailers during recent corporate earnings calls.

In the week ahead, in addition to the highly anticipated inflation data, there will be several other key economic reports including updates on housing, consumer confidence, construction, and manufacturing activity. Energy markets are also in focus ahead of the upcoming OPEC+ meeting this week. Oil prices have fallen for five consecutive weeks after the initial spike higher following the onset of the Israel-Hamas war. Saudi Arabia is asking other members to reduce their oil output quotas in an effort to shore up global markets, but other key members are resisting pressure to curb output, according to Bloomberg.