— Michel de Montaigne
“How many things we held yesterday as articles of faith which today we tell as fables.”
What a difference a month makes. After two months on the ropes, markets raced to a rapid recovery in November. In equities, the stock-market story was rather familiar, even if it did mark an abrupt change from September and October. Once again, a small band of tech giants led a powerful rally, pushing index-level measures well into the green after two months of declines.
The S&P 500 closed the month +8.9% up (its best of the year), while the techy Nasdaq gained +10.7%, notching four straight up-weeks. Over 16 dizzying days at the start of the month, the S&P 500 undid all the damage done in September and October’s correction and by month’s end it stood at 4,568 pts and in striking distance of the 4,589pt YTD high struck in July.
Importantly, although Big Tech remained firmly in the vanguard, the rally broadened as the month progressed. By this week, over 50% of S&P 500 constituents had moved above their 200-day moving averages, a healthy indicator of breadth. The equal-weighted version of the S&P 500 recorded a +8.9% gain on the month, its best of the year (though it does remain well behind its better-known market cap-weighted cousin YTD, at +6.6% versus a cool +19.0%). Moreover, November’s market ebullience spread well beyond US shores; European and Japanese stocks registered their own sizable gains (the Euro Stoxx 50 was +7.9% and the Nikkei 225 +8.5%).
Fixed income markets were not left out in the cold either. Far from it: US bonds enjoyed their best month since 1985 as the Bloomberg US Aggregate Bond Index clocked a +4.5% rise. This was enough to see the index finally turn positive YTD, suggesting it may yet avoid a third straight down year (something that has never happened in the index’s 47 years). European bonds rallied too and the equivalent global index had its best month since 2008, at +2.9%. Yields plunged. Just 16 trading days after the US 10Y yield passed the 5% mark (intraday) not seen since summer 2007, it dropped back through the 4.50% barrier and continued down to end the month at 4.33%.
With risk-on sentiment taking hold, credit spreads narrowed across the month, suggesting investors were taking a rosier view of the macro environment’s threat to corporates’ balance sheets. The move was led by high yield, as US HY spreads tightened -67bps and those in Europe -50bps.
At the root of markets’ about-turn was a sea change in the macro narrative animating investors. The expectation of a ‘higher-for-longer’ interest rate regime that crushed risk assets in September and October was knocked aside by a growing belief that policy rates had peaked – and would fall in the near future.
Ignition for November’s rally came from the latest US Consumer Price Index print, which showed inflation had cooled more than expected in October. (Headline CPI was flat month-on-month, core rose +0.2% and the year-on-year rate slowed to +4.0%.) The CPI number sparked an immediate and dramatic rally in Treasuries, sending 2Y yields diving -23bps on the day. Subsequent data pointed to a slowing of the US economy and added to the market momentum. The unemployment rate rose to a near two-year high of 3.9%, while payroll growth declined. The Fed’s November Beige Book – the monetary maestros’ qualitative roundup of economic conditions – outlined a softening economy as consumers turned cautious. Finally, the prospects of a dovish Fed pivot were further underscored this week when normally-hawkish Fed policymaker Christopher Waller declared himself ‘increasingly confident’ that monetary policy was on the right track to slow inflation – and that cuts would follow once the inflation target was reached.
Markets responded to these developments by progressively pulling forward expectations for Fed policy rate cuts. Whereas at the end of October futures markets were not fully pricing a rate cut until July 2024 and only two full cuts by the end of the year, by the end of November expectations for a dovish pivot had shot right up, with a cut fully priced as soon as the Fed’s May 2024 meeting and well over four cuts by the year’s end.
None of November’s US macro data prints were catastrophic – indeed, plenty of evidence of continued resilience remains. (This week, US GDP growth in Q3 was revised up from an already stonking annualised +4.9% to a blistering +5.2%.) The coupling of easing inflation and gently softening macro indicators has kept the ‘soft landing’ scenario firmly in play. But ultimately, both a soft landing or a recession would most likely see rates come down (the former because higher rates would no longer be needed as inflation fell to target, the latter to ease monetary conditions to re-stimulate the economy). So an expectation of cuts in 2024 is not unreasonable – that is, if you don’t think inflation will either stick at recent levels or surge back up. Yesterday’s eurozone inflation data added to the good news, though. After big downward surprises in Germany and Spain, inflation across the bloc fell to +2.4% YoY in November, the coolest pace since July 2021.
Meanwhile, another encouraging datapoint on the disinflationary front is an oil price that slid across November. Brent crude maintained a five-week losing streak, at one point falling below $80/bl and -15% off the September peak. (Brent closed the month at $80/bl, a -5.5% fall in November.) This slide has come even as OPEC+ has sought to jack prices up with production cuts. Saudi Arabia battled battled to secure further production cuts from its OPEC+ partners, securing only voluntary reductions at yesterday’s postponed meeting. In the wake of the latest fractious negotiations, markets doubted the cartel’s discipline to stick to the newly announced cuts and oil even sold off in response to the announcement.
While ‘black gold’ has struggled, the original yellow version has been doing rather better. Gold punched through the $2,000/oz barrier last week and did not look back, continuing to surge to $2,045/oz at month’s end, in view of May’s 2023 high. This marks a +12.3% jump from the early October low. Geopolitical crisis in the Middle East gave gold its initial impetus in October but into November the move higher was driven by the prospect of lower rates (increasing the appeal of an income-free inert metal) and a weakening dollar. The greenback dialled back markedly across the month: the DXY dollar index dropped -3.3% in November, down to a three-month low. (The prospect of falling rates trims the dollar’s rates-differential appeal.) With rate moves supportive, geopolitical risks still real and central bank demand robust, the outlook for gold is bright, even as it tests record highs.
As we sanguinely observed in the wake of September’s selloff, historical data suggested US stocks were poised for a strong Q4. November’s rally has gone a long way to fulfilling that forecast. We do not dislike markets’ November optimism; it has certainly given us cheer as the days have darkened and the weather turned wintry this month. Nonetheless, we remain watchful. The ‘soft landing’ trade has become consensus, even as the monetary facts remain: a lot of tightening has happened quickly and this always operates with unpredictably variable lags. We share the markets’ view that US policy rates are at or about their peak and the scenarios for nearer-term cuts increasingly outweigh those for a high-altitude plateau at current levels. This underscores the appeal of higher duration assets such as long-dated bonds; these stand to benefit from rates cuts (thus offering some protection against a hard landing) whilst offering attractive carry. Markets must now navigate just one more, festively abbreviated month of trading to secure November’s gains and see out a remarkable year…
If you have any questions about the themes discussed in this article, please do not hesitate to get in contact with us: info@bedrockgroup.ch
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