Major stock indices traded in a tighter range in November when compared to the wild moves of the past six months. While there is still tension in the stock market, it is fairly evident that there are now more optimists than there are pessimists. Economic reports still showed a snail-paced recovery through the middle of November, but there were a number of surprising reports at month's end that gave market players a boost. Corporate profits were almost a non-event this month, as economic indicators and pre-holiday sentiment dominated market news. The issue of any pending war with Iraq took a backseat to economic news as the tensions between Iraq and the United States simmered. The FOMC shocked market players in November by reducing the federal funds rate target by 50 basis points to 1.25 percent - the lowest rate in 40 years. The Fed hinted, however, that this would be the last rate cut for a long time. This truly helped equities, as market players now believe the worst to be over.

The month of November began with a strong three-day rally as corporate profits looked strong and the October employment report came in better than expected. This was followed by a three-day sell-off that brought indices back to earth. Weaker corporate profits were the chief culprits in this sell-off. During the middle of the month, eight out of ten trading sessions showed gains as the technology sector and better news from economic reports infused the market with a sense of optimism. The Dow remained above 8,000-points throughout the month, reaching a month-long high on the 27th. The month's worst one-day performance occurred on the 7th, as increasing jobless claims and weak earnings in some technology-sector companies led the way down. After reaching their lowest levels near the 11th, major indices finished the month strong, with the Dow making a bid to close above 9,000-points.

The high and low levels for the month are highlighted in blue.

Stock prices in the technology sector showed unexpected gains throughout the month. Telecommunications stocks rose slightly after almost a full year of being beaten down. The retail sector was slightly down in the beginning of the month, but picked up towards the end of November as consumers crawled out from under their rocks before the holiday season began. Energy stocks traded well for most of the month, although concerns over war with Iraq and the effect it might have on oil prices made any gains smaller than in previous months. Health care stocks continued their recent declines. Housing-related stocks continue to be a good bet on equity markets as economic reports on the housing market still show gains, not to mention the drop in interest rates helps make mortgage rates lower. Financial stocks are still experiencing nice gains. Travel and leisure stocks were mixed as concern over bankruptcies and strikes in airlines were offset by a stronger month from automobile companies.

The high and low levels for the month are highlighted in blue.

Looking at the performance of major indices week-by-week, all four weeks of November showed gains from the previous week. The best performances -- Nov 1st, 14th, 21st, and 27th -- benefited from strong earnings in technology stocks, strong economic reports, and a Fed-induced interest-rate cut. The Dow closed the month of November with a 5.6 percent gain, while the NASDAQ increased by over 10.1 percent. The Russell 2000 gained 8.1 percent. The S&P 500 finished up 5.4 percent for November. The market-encompassing Wilshire 5000 index posted a 5.5 percent increase.

Treasury Markets:
More declines
The Treasury market continued to move in the opposite direction from equity markets. Treasuries did rally following the unexpected interest-rate cut on November 6th. By mid-month, however, this situation had changed as equities rallied. Economic reports, particularly those towards the end of the month, showed a strengthening economy. Stronger labor markets, a revival in consumer confidence, unexpected increases in the manufacturing sector, and more housing-market strength all hurt Treasury investors in November.

As seen in the chart above, yields were mostly up from October's levels as bond investors now realize that the Fed's 50 basis point rate cut is likely to be the final one in this cycle. The only Treasury security to post a declining yield was the 3-month bill. Typically, yields on 3 & 6 month bills are within a couple of basis points of the federal funds rate target. The 30-year bond did not show much movement in November, adding 6 basis points to its yield. The 10-year note increased by 32 basis points for the month of November. The 5-year note gained 54 basis points. The 2-year note gained 38 basis points to its yield by the end of November. The 3-month bill, as mentioned earlier, outperformed the rest of the securities and closed November with a 22-basis point decline in its yield.

Damir Fonovich, Economist, Econoday