November Market Review
November saw robust market rallies in both equity and fixed income markets, driven by lower inflation and the anticipation of a less restrictive monetary policy expected in 2024. While lower inflation data is important, the primary catalyst seemed to be a less “hawkish” stance from the Federal Reserve, accompanied by a swift decline in the US interest rate curve. Despite strong economic data, there was a noticeable trend of weakening indicators, supporting the narrative the US growth might be undergoing a potential soft landing.
During November, all sectors of the S&P experienced significant gains, except for the energy index, which continued its decline due to OPEC supply news and reduced tensions in the Middle East. The information technology and real estate sectors recorded the highest increases, both surpassing 12%. The broad rise in equity sectors provided optimism about the potential for broader market momentum beyond the “magnificent 7 stocks”. Despite positive earnings releases, some reports were beginning to look less favorable, with “cost-cutting” emerging as a prominent factor in beating estimates. Regardless, the Nasdaq rose +10.84%, and the Dow Jones Industrial Average and S&P followed suit, posting gains of +9.15%, and +9.13% respectively.
While equity market returns outperformed the bond market, November marked a pivotal point in the interest rate cycle, bringing several bond indices back into positive territory for the year. Historic monthly moves were witnessed in credit sectors, driven by narrowing risk premiums and lower interest rates, contributing to strong total returns. Investment grade corporate bonds rose 5.98%, and municipal bonds rose 6.35% in November. The Bloomberg Aggregate Bond Index rose 4.53%. Equity-correlated markets also experienced significant gains, with high yield recording a 4.53% increase, and emerging market debt returning 5.42%. Preferred and hybrid bonds saw a robust rise of 7.98%, particularly as financial institutions rebounded. As mentioned, the majority of returns in the markets stemmed from the sharp decline in rates that began on the first day of November, coinciding with the FOMC meeting.
During the month, short-term treasury bills experienced a modest decline (the 6-month US T-bill fell from 5.57% to 5.40%). Meanwhile, a significant portion of the yield curve, spanning from 2-year to 30-year maturities, witnessed declines ranging from 40 to 60 basis points. The inverted yield curve gained strength as investors extended their positions to lock-in longer durations. The benchmark US 10-year note saw a drop of 60 basis points, resulting in a yield of 4.33%, down from the 4.93% recorded at the end of October.
November witnessed a distinct shift in investor sentiment which fueled the sectors previously mentioned. Markets have maintained a notable level of volatility entering the holiday seasons. Despite the Fed’s continued comments about maintaining higher rates to combat inflation, investors have begun to price-in future Fed Funds rate decreases as data continues to unfold heading into the year-end.
The “buy everything” rally, initiated by the November 1st FOMC meeting announcement, persisted with minimal interruption throughout the month. The board opted to leave rates unchanged, and Chairman Powell expressed caution in maintaining a restrictive monetary policy stance in the existing economic environment. While acknowledging the addition of tighter financial conditions in their statement, the Fed acknowledged the impact of higher rates on tightening economic conditions and indicated comfort with the current level of rates.
The language from previously “hawkish” Fed Governors began to soften as the month progressed. FOMC member Philip Jefferson, who advocated for more hikes previously, now suggested that higher bond rates would be a factor in future decisions. Others, including the Fed Presidents of Philadelphia and Atlanta, hinted that both monetary policy and existing interest rates were at a sufficient level to bring inflation down to their targeted 2% level.
Job market data began indicating signs of a slowdown, with non-farm payrolls registering 150,000 jobs, falling short of the expected 180,000, and showing some downward revisions to prior months. The unemployment rate inched up to 3.9%, but still represented the most robust piece in the economic landscape.
As a result, retail sales continued to exhibit strength, reflecting the overall health of the US consumer. Black Friday shopping reached record levels, but subsequent reports indicate a slowdown, suggesting that consumers are seeking discounts.
Surprisingly, housing starts, and new home sales showed an increase compared to previous reports. There are emerging signals of growing credit demand and savings rates coming down quickly, as evidenced by some company reports and anecdotal evidence.
Even with these mixed indicators, the release of a third quarter GDP revision at the end of November showing 5.2% annualized quarter-over-quarter growth, suggests that the economy remains strong despite facing certain headwinds.
Inflationary pressures are showing signs of easing, providing a sense of comfort for both the Federal Reserve and investors. The economic backdrop has been somewhat promising this fall. The CPI, released on November 14th, contributed to the bond rally as month-over-month growth reached 0.0%. CPI ex Food and Energy also saw a slight decline to 4% year-over-year. Unit labor costs fell to -0.8% in the third quarter. PPI also fell slightly, and the Fed’s preferred gauge, Core PCE data, remained well subdued.
As we enter the final month of the year, surpassing the performance seen in November will prove challenging for the markets. Geopolitical concerns have resurfaced, and diplomatic efforts in the Middle East have waned, heightening uncertainties.
Equity valuations and the upward trajectory of bond prices present complexity for asset allocators as they strategies for 2024. Despite investors moving away from high-yielding money market funds last month, cash investments remain at historically high levels. The rise in gold prices, driven mainly by lower interest rates, may underscore the prevailing uncertainty as we approach an election year.