November 2023 Market Update: 30-day Bull Market-Is More Upside Ahead?
In our last market update on November 7th, our contention was the markets were mired in a 2-year bear market and a major pain point was the lack of upside participation from most stocks outside the “magnificent-7”. We came into November defensive, but we were willing to increase equity exposure should more stocks and sectors start participating in the upside. November saw exactly that as many more stocks decided to participate in the rally including small caps, mid-caps, and international. We like it when a broad rally occurs across the market as it shows signs of market health.
During the month we increased our equity exposure across strategies. Our stock strategies, J2 Dynamic Mid-Cap Growth, and J2 Dynamic Value & Dividend went risk-on during the month taking their equity exposures up past 85%. These produced some of the largest monthly returns we have seen this year. We also allocated more equity across other strategies though in a more methodical and measured manner where we would consider those more neutral here.
We will now watch any market pullbacks from here to assess continued health. A positive sign for continued gains would be a market pullback that gets bought aggressively.
Stepping back, it’s important to remember that the S&P 500 is at the same level it was in July of this year but also where it was in March of 2022 and September 2021 (27 months ago). While the return for November was incredible, the returns in August and October were terrible.
S&P 500 CHART
The stock markets are now trying to price in a soft landing in the U.S. economy with slowing but still positive growth and inflation returning to baseline going into next year. In this scenario, the markets would expect the Federal Reserve to start cutting interest rates. While this is a possibility, historically, this is also a low probability. I think the next 60-90 days should provide more clues on the economy in 2024. A recent development that needs to be watched is the price of oil. Since September, Oil has crashed down -26%. While some of this downdraft can be attributed to falling inflation expectations, I can tell you that healthy growing economies don’t see oil falling like this.
CHART OF OIL
November economic recap:
In November, the financial markets used a combination of moderating inflation pressures and a more dovish tone from the Fed to produce their best month of 2023. Investors have been waiting for some time for signals that the Fed’s rate hiking cycle is ending. Chair Powell’s comments following November provided that signal, and both stocks & bonds rallied sharply in the aftermath. The S&P 500, Nasdaq 100, Russell 2000, and long-term Treasuries all posted gains of 9-10%. Better yet, the equal-weight S&P 500 also delivered a 9% return, indicating that November’s rally was much broader than the “magnificent 7” rally that has driven much of 2023’s equity returns. This will likely need to be a feature going forward if this market wishes to extend its current run into 2024.
10-year Treasury yields have retreated by about 75 basis points since their late October high. A lot of that is simply giving back the rise in yields the market experienced in the months prior, but it’s also an indication that investors may be getting very bullish on the idea of rate cuts coming soon in 2024. Right now, the futures market is pricing in a 60% chance for a cut at the March meeting, something which would have been considered unlikely at best just a month ago. Powell is still floating the idea that further hikes are still possible to retake the narrative, but investors remain confident, perhaps a little overconfident, that monetary policy relief is on the way. We expect that Powell will try to maintain a slightly hawkish tone in his comments to prevent yields from falling too far, too fast, and run the risk of another bout of inflation.
For now, inflation continues to trend lower, and the labor market continues to add jobs. As long as those two trends continue, the financial markets can enjoy a level of support that carries forward into the new year. The geopolitical landscape remains an uncertainty that could shift at any moment. However, the markets are still handling the conflict in the Middle East calmly and reasonably despite some occasional volatility in the oil market. Global recessionary risks still loom and any cracks in the labor market could be an early sign that economic sentiment is getting ready to turn. December has traditionally been a month with lower volatility and positive returns as investors enjoy the season's spirit. The S&P 500 is close to establishing a new all-time high for the first time in almost two years, but the new year could present some challenges as we shift towards a new monetary easing cycle from the Fed.
