Government Spending; Nothing To See
A summary of the stock market performance
In November 2023, the stock market experienced a significant rally, marking one of its best months in recent history. Here are the key highlights:
Major Indices Performance
S&P 500: The S&P 500 surged by 8.9%, its largest monthly gain since July 2022, recouping losses from the previous three months and ending just 4.8% below its all-time high from January 2022[1][4][2][13].
Dow Jones Industrial Average: The Dow Jones Industrial Average jumped 9.15%, closing at its highest level since January 2022. This marked its best month since October 2022[3][5][11].
Nasdaq Composite: The Nasdaq Composite advanced by 10.7%, also achieving its best monthly performance since July 2022[9][2][13].
Sector and Stock Performance
Technology: Technology stocks led the market, with the sector gaining 13% in November. Notable performers included Nvidia and Microsoft [1] [4].
Real Estate and Financials: These sectors also saw significant gains, each rising by 12% and 11%, respectively [1][4].
Energy: The energy sector was the only laggard, declining by 0.8% due to increased oil supply concerns [1] [4].
Economic Indicators and Market Sentiment
Inflation and Interest Rates: A series of economic reports indicated that inflation was cooling, which bolstered investor confidence that the Federal Reserve might halt further interest rate hikes. The Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) price index both showed slower inflation growth [1] [4][3][5][4][11].
Federal Reserve: The Federal Reserve kept its key interest rate unchanged, further fueling optimism in the market. Investors began to anticipate potential rate cuts in 2024 [1] [4] [3] [5][11].
Notable Stock Movements
Top Gainers: Some of the top gainers in the S&P 500 included Insulet (+42.6%), Expedia (+42.9%), and Generac Holdings (+38%)[5][7][6][9].
Top Losers: Among the worst performers were Agilon Health (-41%), BILL Holdings (-28.3%), and Paycom Software (-25.7%) [5][7].
Global Markets
International Equities: Global markets followed the U.S. lead, with the S&P Global BMI ex-U.S. returning 9.06% in November. The S&P Developed BMI ex-U.S. Index and the S&P Emerging Markets Index also posted strong gains of 9.75% and 7.19%, respectively[7][8].
November 2023 was a robust month for the stock market, driven by positive economic data, cooling inflation, and a stable interest rate environment. The rally was broad-based, with significant gains across various sectors, particularly technology, real estate, and financials. The optimism was further supported by expectations of a potential shift in Federal Reserve policy towards rate cuts in the coming year.
Bond market in November 2023:
Significant Rally: The bond market experienced a substantial rally in November, with government bonds staging their biggest rally since 2008. The Bloomberg U.S. Aggregate Bond Index recorded its best monthly return in 30 years [8][9][10].
Interest Rate Decline: There was a sharp decline in interest rates across the yield curve. The 10-year US Treasury yield fell by more than 50 basis points, starting the month at 4.90% and ending at 4.36%. This marked the largest monthly rate decrease since 2011 [8][9][10].
Factors Driving the Rally:
Federal Reserve Action: The Fed held interest rates steady at the target range of 5.25%-5.50% during their November meeting, marking the second consecutive pause in rate hikes [11][6].
Market Sentiment: Investors began anticipating monetary easing and possible rate cuts in 2024. The futures market priced in a potential decline of up to 133 basis points by the end of 2024 [8] [9] [10].
Performance Across Sectors: Various fixed income sectors outperformed Treasuries on a duration-adjusted basis, driven by tightening credit spreads and increased risk appetite [8] [9].
Impact on Other Markets: The bond rally had positive spillover effects on the stock market, with major indices like the S&P 500 and Dow Jones Industrial Average experiencing their best months since 2022 [12][8].
Yield Curve: Despite the overall decline in rates, the yield curve remained inverted, reflecting ongoing economic uncertainties [9] [10].
Cautionary Notes: Some analysts warned that the case for further significant gains in bonds had become more challenging after the November rally, as much of the positive sentiment may have already been priced in [9] [10].
This dramatic shift in the bond market during November 2023 reflected changing perceptions about inflation, economic growth, and future monetary policy, leading to one of the most significant monthly rallies in recent years.
Commentary:
What a month for the markets. As mentioned in our last newsletter, historically we've seen sharp bounce backs from corrections in bear markets. November was no different. As noted above both the bond market and the stock market experienced sharp increases in price. This move illustrates that bonds do not always offer as much diversification as one would hope. When the markets are going up together, nobody seems to ask questions, but when the markets going down, everybody is scratching their head asking why stock and bonds prices are so correlated… that's another discussion or a different day and different place.
The biggest underline question in my mind is why? Inflation is still at decade highs, interest rates have not declined much, credit card delinquencies have skyrocketed, and the housing market is still stagnating. It all appears that the economic data is still pointing south… many of the similar things happened and the buildup the Great Financial Crisis.
In a Webcast on 11/21/2023 Keith McCullough, CEO of Hedgeye, talks specifically about government spending, in this webcast he says the following, “Does anyone remember losing 20%, 30%, 80% of their hard-earned capital in 2022? Well, that's not politically palatable. So, the government started spending their brains out.” He attributes much of the stock and bond market pricing increasing two government spending. The piece of which government is willing to spend to keep the GDP artificially high short-term solution with long term negative side effects.
It's hard to fathom how the government spending, which accounts for so much of the GDP, will be sustainable. Bluntly speaking it is not. Government spending must come down or inflation will continue to rise. As inflation continues to rise the Fed, as mentioned in previous newsletters, only has two tools to combat inflation: The Fed Funds rate or quantitative easing/tightening. This is something we need to keep our eye on.
Conclusion:
As a young athlete, I recall a coach whom I respected a great deal giving me a life lesson. He said, “Offense may put people in the seats, but defense is what wins championships.” We've been saying there needs to be a correction for 12-18 months due to the economic data, our client portfolios have reflected this over that period.
Despite this valid month of November, the economic data is still pointing South. Case in point industrial production overlaid with recession dates curiosity of Hedgeye. You will notice that since 1974, 7 out of 10 dips in year over year manufacturing, Ex-autos, has been a precursor to a recession.
We are still defensive with cash as an overweight as well as sticking with our managed futures allocation. As we see economic indicators start to turn positive, we will go on the offense. That does not mean we will be chasing returns, fads, or anything like that but we will lean in and deploy the cash we have on the sidelines. As my coach said, defense wins champions, he also said the best defense is a good offense: The Coalescence of the Art and Science of Investing.
Model Performance Update
Our Moderate model portfolio returned 1.74% during the Month of November and finished the month with 5.09% Year To Date(see charts below).
Hedgeye is claiming the U.S. is in recession like many market pundits and economists have started claiming over the past week. Coupled with the recession in China and Europe, Hedgeye is getting bearish on oil, and added gold longs back to its ETF list. Japan is back to bullish signal; we will maintain this in our portfolio. HE is adding short-dated bonds (SHY), we will watch and look to add in the future.
Changes to the model portfolio in November
- Initiated position in gold miners (GDX)
- Increased position in gold (AAAU)
- Sold all TLH, TLT, EDV
- Replaced XLV with PINK in small accounts given high XLV price.
November 2023 performance with benchmark
2023 Year to Date Performance with Benchmark
If you were to have any questions regarding the above, please reach out to us to set up a one-to-one meeting to review your situation.
Sincerely,
Bryant Andrus, MSF, CFP®
President
SBC Investment Management
P: (602) 641-5996
M: (319) 520-2033
E: bandrus@sbcinvestmentmanagement.com
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[1] https://www.tradestation.com/insights/2023/12/01/november-2023-recap
[2] https://apnews.com/article/financial-markets-stocks-dow-nasdaq-b7026a755646201b25598cef1dd5e29d
[3] https://www.reuters.com/markets/us/wall-st-futures-edge-higher-easing-inflation-hopes-2023-11-30/
[4] https://www.cashdollarandassociates.com/november-market-report
[5] https://www.morningstar.com/markets/best-worst-performing-stocks-november-2023
[6] https://www.cnbc.com/2023/11/29/stock-market-today-live-updates.html
[7] https://www.wstam.com/news/market-updates/november-2023-global-equity-markets-review/
[8] https://cwoconner.com/market-review-november-2023
[9] https://www.man.com/maninstitute/man-frm-early-view-december-2023
[10] https://www.breckinridge.com/insights/details/november-2023-market-commentary/
[11] https://www.cnbc.com/2023/11/01/fed-meeting-november-2023-.html
[12] https://www.morningbrew.com/daily/stories/2023/12/01/bonds-rallied-in-november
[13] https://www.morningbrew.com/daily/stories/2023/12/01/bonds-rallied-in-november