Santa Claus Rally in November?
Markets rebounded with a vengeance in November after Fed comments indicated less potential for future monetary tightening which spurred a decline in yields. Then, a cooler inflation print hit mid-month which took yields down further and reinforced the market’s expectation for no additional rate hikes. Yield sensitive areas, such as real estate, utilities, and traditional fixed income, benefitted strongly. Overall, November was the strongest month so far this year for most major indexes, which experienced several consecutive weeks of gains for both equity and fixed income.
Soft Landing Narrative Back in Focus
The Federal Reserve took the spotlight in November, beginning with a well telegraphed “hold” in rates to start the month. While Fed Chair Jerome Powell left the door open for further hikes, he added that they were looking for data to show inflation coming down to Fed targets. As if on cue, the incoming data seemed tailor-made to fit the hold narrative, as the job reports showed continued softening and both oil prices and inflation fell. Despite the Fed’s continued stance that rates could move higher, markets assigned a mere 4% probability of a hike at the Fed’s December meeting and have priced in a rate cut as early as March or May next year.
Oil Prices Fall
In defiance of an ongoing war in the Middle East and voluntary supply cuts planned by OPEC+ (note: more than half of the cuts are simply an extension of previous cuts by Saudi Arabia and Russia), oil prices declined over the month with the Brent Crude Oil benchmark falling more than 5% in November. While seemingly counterintuitive, the downward price movement reflected trader’s lack of faith in the OPEC+ members to cooperate amid lower demand expectations due to slowing global growth.
Commentary From Asset Managers
US Small Cap Growth Manager
Small cap stocks are capital market dependent, making them more susceptible to higher interest rates. A soft-landing scenario would likely be a tailwind for small cap growth while a strong GDP growth (+3%) would likely be good for small cap value.
Emerging Market Manager
India has been a very fertile ground to find investments, benefitting from a long runway for growth and strong governance. While the country’s growth has been a developing story in the past few years, its status as “not China” has put it in the limelight and the extended valuations reflect that attention.
Global Bond Manager
The market’s view on rate cuts for next year is reasonable. If inflation continues to trend down and employment weakens, the Fed will likely be willing to cut rates next year. If the Fed strongly believes they will cut rates next year, which will be data-dependent, they will likely want to communicate this early enough so that it doesn’t look like rate cuts are being timed to influence the election. Look to the Fed Chairman to use speeches and press conferences to jawbone the market lower and put downward pressure on inflation.
Chart of the Month
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