Monthly Market Update | November 2023

Current market and economic conditions

• In November, the S&P 500 Index was up 9.13%, while the Bloomberg Barclays US Aggregate Bond Index was up 4.53% and the Bloomberg Barclays Municipal Bond Index was up 6.35%.
• The S&P 500 Index experienced its second-best November since 1980, behind only the pandemic-fueled rebound in 2020, snapping a 3-month losing streak. It is also the seventh best return for any month in the last 30 years. Small Cap and International stocks enjoyed an equally strong return for the month of November.
• The bond market also continued a surge that began in mid-October. After peaking, at 4.98%, the 10-year Treasury yield has fallen to 4.25%. This has caused bond values to rise, bringing the total return for the year so far into positive territory.

Bond market

• The current bond market rally is fueled by the growing possibility of a soft landing for the economy. Despite numerous recession forecasts in 2022, 2023, and now going into 2024, the actual economy continues to grow. Third quarter GDP was recently revised upward to 5.2%.
• With inflation easing, the Federal Reserve has also taken a pause in their aggressive interest rate increases. The Futures market is currently forecasting that the Fed may start reducing the Fed Fund rate sometime in the middle of 2024. With the target inflation rate of 2%, the reduction in the Fed Funds Rate is seen as a normal return toward 3% short-term rates – not due to an economic slowdown.
• The rising unemployment rate is one economic data point that would appear to be negative but has actually been going up for a positive reason. The unemployment rate is based on survey data. Basically, if someone had previously reported that they were not employed and not looking for work, they would be deemed as retired – not unemployed – and not counted in the unemployment number. If the same person had then reported that they were not working but were looking for a job, they would be counted as unemployed. The unemployment rate is currently going up because the strong job market is drawing more people into the labor force and not because people are losing their jobs. This idea is also confirmed by the weekly Initial Claims for Unemployment Insurance data showing newly laid off workers still hovering near historic lows.
• Given the relative strength of the economy and the pause by the Federal Reserve, bond investors should now be in a better position to enjoy positive total returns from higher current yields and potentially rising bond values as interest rates possibly fall further.

Stock market

• For most of 2023, the US stock market had been led by a few very large Tech sector stocks. In November, that leadership spread out amongst many more sectors and asset classes. In US large cap, Value stocks (9.6%) outperformed Growth stocks (8.8%). Midcap (10.2%), Small Cap (9.0%) and International (9.3%) stocks also rallied very strongly in November. For the past two years, Mid and Small Cap stocks had been lagging as the market was concerned about the potential for an economic slowdown. These stocks typically rally at the beginning of an economic recovery. This time, the market may be signaling a recovery from an economic downturn that never happened. If the market is correct, unlike US large Cap stocks, which most believe to be overvalued, Mid and Small Cap stocks may provide better upside given their relative underperformance over the past two years. International stocks are also still hovering near historic low valuations when compared to US large cap stocks. The continued global political uncertainty has led to International stocks currently priced at a 33% discount to US large cap stocks.
• Virtually no investor expected strong market returns in 2023. Given the current consumer sentiment, it is not too late to still enjoy future gains. The Consumer Sentiment Index is a contrary indicator that may prove the market recent momentum has staying power. Typically, when the Consumer Sentiment Index is near its lows, the future potential for the market is quite positive. Despite rising from the all-time low point for the Index in June of 2022, the Index is still close to the lows of previous market cycles. As consumers start to feel more confident about the soft landing, they may put more money to work in the stock market, propelling it upward. The average return over the following 12 months for the stock market from similar low points has been over 24%. Past performance is no guarantee of future results, but the adage of buying stocks when investor sentiment is low has been a remarkably successful strategy over the history of the stock market.
• The US economy has transitioned from the rapid recovery phase to a slower growth phase between 2020 and 2023. With the Federal Reserve prescribing strong medicine in the form of higher interest rates, certain market sectors and the overall economy may have to endure some short-term side effects. In this phase, companies with strong fundamentals, in categories such as consumer durables and health care, can produce consistent earnings and dividends, as well as those bringing innovation and market share dominance in a slower growing economy. Those opportunities can be found in both US and international stocks.

Portfolio management

• The allocation for each investor should be diversified between growth and safety based on their own tolerance for risk in the short run and their desire for growth in their investments in the long run. Determining the appropriate asset allocation and risk-reward trade-off is the most important decision for investors. Once determined, staying invested during periods of uncertainty and rebalancing back to the selected risk profile can help investors achieve their long-term goals.