John Gorlow
| Dec 08, 2023
Investors celebrated a blockbuster November as markets posted their biggest monthly gains in more than a year. The news was superb, as bonds turned in their best monthly performance in nearly 40 years and the S&P 500 index returned a whopping 9.13%. For many, it felt like the stars aligned and their dream-scenario was coming true as robust growth, diminishing inflation, and slowing job growth pointed to a gentle landing and an end to rate hikes. But like the morning after a blow-out party, there may be a price to pay for all that enthusiasm.
We’ll see what the Fed has to say about the future of interest rate hikes following its December 12-13 Open Market meeting. Fed Chair Jay Powell continues to play the role of stern parent, emphasizing that it is premature to speculate on when the Fed’s restrictive stance may end. The markets do not seem to take his warnings seriously. With the steep decline in yields in November for the 10-year Treasury bond (down .60 percentage points) and the two-year note (down more than .40 percentage points), investors are anticipating as many as five interest-rate cuts in 2024, the first coming as early as March.
Recent history is rich with examples of market miscalculations. And the Fed has made some major miscalculations of its own, including its infamous “transitory inflation” call that led to soaring rate hikes in the first place. Now the Fed is inclined to be cautious while investors want to charge full steam ahead. This sets up the potential for a perverse showdown, in which markets get exactly what they don’t want by rallying too much, too soon.
“This is not the first time markets have challenged the Powell-led Fed view on the monetary policy outlook. Just a year ago, a similar scenario unfolded, with markets pricing in cuts for 2023 that never materialized,” writes Mohamed El-Erian (Financial Times, 6-December). He warns that “the more markets diverge from the Fed’s signals, the more likely they are to push the central bank to adopt the path that is detrimental to them. This is because markets’ affinity for rate cuts loosens financial conditions and heightens the Fed’s concerns about inflationary pressures, thereby delaying the rate cuts that the markets are betting on.”
Current investor enthusiasm may be warranted or not, but without a doubt economic and world news of next week or next year will change the mood again. How to prepare when you are optimistic but also cautious? The same as always. Guardrail against uncertainty by remaining diversified, allocate assets according to your long-term goals, and optimize your fixed-income investments to your liquidity requirements. Consider that inflation may be higher or lower in the future; indeed, many investors are betting that the Fed will settle for a target of 3% rather than 2%. None of this requires radical restructuring of your investment strategy. It only requires the ability to live with ongoing uncertainty, regardless of which way the Fed or markets move.
November Market Report
Wall Street ended November with its biggest monthly gain in over a year. The rally was driven by hope that the Federal Reserve will begin to trim interest rates in 2024 and 2025.
Fixed income yields declined, and U.S. bonds posted their best monthly performance in nearly four decades, pushing year-to-date returns back into positive territory.
The S&P 500 Index rallied in November, returning 9.13%. Most sectors advanced for the month, led by the rallying information technology, real estate and consumer discretionary sectors. The energy sector declined.
Non-U.S. stocks experienced similar monthly gains. Falling government bond yields and signs that central bank rate hikes may be close to ending added fuel to the markets. Emerging markets stocks also advanced but underperformed U.S. and non-U.S. developed-markets stocks.
The pace of annualized U.S. headline inflation eased from 3.7% in September to 3.2% in October, while core inflation slowed from 4.1% to 4%. Amid moderating food and energy prices, inflation continued to slow in Europe and eased in the U.K., but consumer prices remained above central bank targets.
U.S. and non-U.S. developed-markets stock gains were widespread in November, and large- and small-cap stocks delivered similar returns. Growth stocks generally outperformed value stocks across capitalizations.
After topping 5% in October, the benchmark 10-year U.S. Treasury yield dropped sharply in November, and the broad bond market rallied for the month.
As always, if you have questions about your portfolio or allocations, please contact us. We are here to help.
Finally, all of us at Cardiff Park Advisors wish you, your family and loved ones a healthy and safe holiday season, and a very happy new year.
Regards,
John Gorlow
President
Cardiff Park Advisors
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