A Month At A Glance
- Equity markets surged in November with emerging-market equities outperforming their developed market counterparts
- The prospect that U.S. inflation may have finally peaked brought on the hope that Fed interest rate increases may slow
- Amid widespread domestic protests, there were signs that China’s strict zero-COVID rules may finally be loosening
- Government bond yields dropped during the month boosting core bond returns and further inverting the yield curve
The stock market continued to rally in November in the hope that interest rate increases would slow. The S&P 500 gained 5.6% last month. This narrows the year-to-date loss to 13.1%. The month started off on shaky footing following the November 2nd FOMC statement and press conference. The S&P 500 fell nearly 4% in the first three days of November—before staging nearly a 10% rally to close out the month. Equity markets shrugged off Chair Powell’s hawkish comments during his presser and surged higher during the month.
It is worth noting that two events drove the preponderance of market gains last month. The first event was the November 10th CPI release (for the October inflation reading). Both the 7.7% year-on-year and 0.4% monthly CPI figures were below consensus. It was the first sub-8% headline inflation reading in eight months. This sparked a strong rally in both stocks and bonds. On November 10th, the S&P 500 gained 5.6%, while the Bloomberg US Aggregate Bond Index was up 2.0%.
The second large gain in November came on the last day, following Chair Powell’s speech at the Brookings Institution. Powell confirmed that smaller interest rate hikes were coming—and all but confirmed that a 50 basis point hike could start in December. This helped the S&P 500 gain 3.1% that day. The 5.6% daily gain on November 10th and 3.1% daily gain on November 30th accounted for all (and then some) of the full month return of 5.6%.
Developed international and emerging-markets equities posted their best monthly gains in years, and their best month relative to US equities since May 2009. MSCI EAFE gained 11.3% in the month, while MSCI EM jumped 14.8%. The US dollar’s 5% reversal during November played a part in the outperformance of foreign stocks. Much of emerging-markets’ strong performance was driven by Chinese equities. After nearly a 30% drubbing in September and October during the lead up to the 20th National Congress, the MSCI China Index jumped nearly 30% in November. This was the best monthly return for Chinese stocks since the late-1990s. Rumors and signals around a loosening of China’s harsh zero-COVID policy was a big reason for the jump in Chinese stocks.
The Fed delivered its fourth straight 75 basis points rate hike in early November—bringing their target fed funds rate level to 3.75%-4.0%. A smaller 50 basis point hike in mid-December is widely expected. There is then a month and a half until the following Fed meeting, and less clarity on the size and speed of hikes next year. However, the market has started to bid up risk assets with the belief that monetary policy will be less aggressive going forward. Rates fell in the US last month, resulting in a positive return of 3.7% for the Bloomberg US Aggregate Bond index. Corporate spreads narrowed during the month, which helped investment-grade corporates outperform the core bond index.
October’s headline CPI release on November 10th was better than (lower than) expectations. This helped propel the idea that peak inflation is behind us and will lead to a less aggressive Federal Reserve—this narrative was bullish for both stocks and bonds. The release of the Fed minutes bolstered the idea of slower hikes, saying “a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate.” The minutes, as well as Powell’s speech in late November, pave the way for a step down to a 50 basis points hike at the December 14 FOMC meeting.
Easing inflation is certainly a welcome sign, however, it remains well above the Fed’s stated target of 2% average inflation. Consumer goods inflation, which drove a large part of inflation last year, has started to come down. However, stickier services inflation remains high and has not shown meaningful signs of slowing.
The other meaningful market-moving event during November was out of China. Investor sentiment around China improved following signs that their strict COVID measures might be relaxed. Even though a complete reversal of their zero-COVID rules likely remains a ways off, just the easing of restrictions and a drive to vaccinate their elderly population was enough for the market to see the light at the end of the tunnel. Many investors were willing to speculate on the path to reopening the Chinese economy—and this resulted in eye-popping returns in November. Both the MSCI China Index and Hang Seng jumped nearly 30%. The NASDAQ Golden Dragon China Index (which is composed of US exchange-listed companies that are incorporated in China) gained 42% in November!
We did not make any asset allocation changes in November. Given the rise in risk assets over the last two months, it is worth asking whether or not our outlook has changed or if we are considering taking additional risk off the table. The short answer is that our outlook hasn’t changed. We continue to see an increasingly higher risk of an economic and earnings slowdown over a shorter-term (12-month) horizon. Higher stock prices increase the downside risk in the event of an economic slowdown, and so it is natural to question if it’s worth tamping down portfolio risk exposures even further. While this is an ongoing discussion, there are no trades imminent.
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