Monthly Market Update
- The S&P 500 snapped its three-month losing streak with a return of 9.1%.
- Foreign equity markets joined the rally with a similar 9% gain.
- The bond market had its best month since the 1980s—as the Bloomberg U.S. Aggregate Index rose 4.5%.
- Interest rates moved higher in the month, with the 10-year US Treasury briefing touching 5%.
It was a November to remember. It was an “everything” rally during the month. Record gains in November were on the back of three straight months of losses for the stock market and six consecutive months for bonds. The 9.1% gain of the S&P 500 was its 7th best monthly return this century. The Bloomberg U.S. Aggregate Bond Index rose 4.5%, which was its best monthly gain this century and its best month since the mid-1980s.
Developed international stocks narrowly outperformed the S&P 500. MSCI EAFE gained 9.3% in November, while emerging-market stocks gained a solid 8%. A weaker dollar helped dollar-based investors in foreign markets. For example, MSCI EAFE gained 5.6% in local currency terms, but netted a solid 9.3% in dollar terms.
As the narrative around peak rates was reinforced throughout the month, growth stocks added to their enormous year-to-date lead over value stocks. The Russell 1000 Value Index posted a more than respectable gain of 7.5% but was not a match for its growth counterparts’ return of 10.9%. So far this year, large cap growth stocks are outperforming large cap value stocks by a colossal 31 percentage points! 2023 has been the second best year for growth stocks relative to value stocks since the first full calendar year of the Russell 1000 style indexes in 1979.
After touching 5% during October, the 10-year U.S. Treasury rate fell meaningfully throughout November. It eventually ended the month at 4.37%. This helped propel the Bloomberg U.S. Aggregate Bond Index to a return of 4.5%—its best month since 1985. This rally in Treasury yields occurred despite a mid-November report from Moody’s that cut the U.S. credit rating outlook from “stable” to “negative” on concerns about fiscal deficits and debt affordability. This follows another prominent credit rating agency, Fitch Ratings, which downgraded U.S. sovereign debt earlier in the year.
Softening inflation data and a cooling labor market were looked upon constructively by the markets. Both reinforced the view that central banks have finished their swift tightening cycles. And even though central bankers may not want to cut rates in the near future, investors are anticipating that peak rates have been reached.
On the inflation front, core PCE (the Fed’s preferred inflation measure) continues to come down. The recently released figure for October was 3.5% year-over-year. This is down from a peak of 5.6% in February 2022. A more real-time measure of core PCE—the annualized six-month figure—is running at 2.5%, which is closing in on the Fed’s 2% long-term target. Should inflation continue to fall without a meaningful uptick in the unemployment rate or slowdown in the economy, the Fed may pull off the “soft landing” scenario that seemed such a low probability a year ago. For now, the macro conditions are benign; however, the impact of 550 basis points of rate hikes in the span of 16 months could still rear its head.
While the labor market remains on solid footing, there are signs it is cooling. A softer jobs market has generally been viewed as positive by the market as it lowers the potential for additional rate hikes by the Fed. A sharp acceleration in the unemployment rate would certainly be looked upon negatively by investors; however, for now, a cooling jobs market is encouraging. One data point showing signs of increasing weakness in the labor market is that continuing jobless claims (a measure of how many people are receiving unemployment benefits) have risen to a two-year high. For the week ending November 18, continuing claims hit 1.93 million. The measure has been moving higher since September—indicating increasing difficulty for those who are unemployed to find a new position.
One well-known recession indicator linked to the jobs market is the Sahm Rule (named after its creator, Claudia Sahm). This recession indicator is triggered when the three-month moving average of the unemployment rate rises by 0.5% above the minimum of the three-month averages over the previous 12 months. Historically, when this signal has been met, the economy is in a recession. Though the Sahm rule is not a leading indicator, it does have a solid track record of validating recessions. It has been increasing sharply in recent months and could be triggered next year.
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