November was a solid month for the markets and for all of Appleton Group’s managed portfolios. But the market appreciation wasn’t for the reason you might think, and it’s an important thing to note. In late October, the Federal Reserve did something very quiet but really important: it injected significant additional liquidity into the markets (read: stimulus) to address a lack of capital at several major U.S. banks.

How could major banks be facing a capital crunch? With unemployment low and the markets breaking new records, how could there be a need for even more stimulus?

For more than a year, President Trump has been noting that interest rates in the U.S. are too high and that additional stimulus is warranted. He isn’t wrong – interest rates here in the U.S. are significantly higher than overseas, where countries like Germany and Japan currently offer negative rates. So the Fed’s effort to inject liquidity into the markets is really an effort to push short-term rates lower. We’ve been saying for years that without additional stimulus either from the Fed or from Congress (yes, tax relief can be stimulative), it will be difficult if not impossible for markets to move higher.

And it worked. Overnight rates dropped during the month of November, and all three of the major U.S. markets responded positively. Stocks rose, as did real estate and bond prices. There was really no bad place to be during the month. We’ve been assertive in our allocations for much of the year, and the results have been quite good.

But toying with additional stimulus at the top of the market is a dangerous gambit. If additional capital doesn’t lead to actual economic growth down the road then markets will have no choice but to reprice themselves lower. Smoke and mirrors are great for magicians, but not for real value. And when the smoke clears, there had better be real results or investors will quickly realize that it was all just an illusion.

What to watch for in December: Is China serious about a new trade deal? Will the significant slowdown in U.S. manufacturing lead to renewed concerns about a recession? Have global interest rates really bottomed? And what of the political theater in Washington? Favorable answers to these questions will likely mean an additional leg higher. But with the markets now priced for perfection, any surprises are sure to lead to market weakness heading into the end of the year.