Jordan Daugherty, CFA, Investment Analyst, presents our December video market update and shares what FSA is doing to respond.
Stock Market Update Transcript
Hello. I’m investment analyst Jordan Daugherty, and this is your November market update. As the old market saying goes, “The market takes the stairs up but the elevator down.” Well, the last month flipped the script as global stocks zoomed up to record their strongest month in three years, gaining 8.9%. The move nearly retraced the 10% downturn we experienced from August through October. Volatility levels flattened out throughout the move, which helped to reinforce near-term optimism.
As you can see in this chart of the VIX Volatility Index, popularly known as the fear gauge, implied volatility has dipped to pre-pandemic lows and continues to record new lows for the year. Investor confidence stretched far and wide in this broad-based rally. From big tech to utilities, every sector of the stock market, except for energy, participated, with even emerging markets and small cap stocks joining in the rising tide.
The silver lining in November’s upturn has been fixed income’s performance. Since the Fed unleashed its wrecking ball of rate hikes last year, something that ended in the worst year of bond losses in our country’s history, investors are eyeing the opportunity for a rebound. Long-term yields backed off an aggressive ascent as the Federal Reserve took a break from rate hikes and signaled the potentially more dovish policy path forward. Bond markets responded with their best monthly return in over 10 years, making this rally the most robust of its kind year to date. FSA has responded to the move and deployed most of the cash we raised since the last summer selloff. With inflation tempered and closer to the 2% long-term goal, many investors have interpreted a downshift in hawkish policy from central bankers.
Here’s a chart of the annual inflation rate’s movements each month since the beginning of the year. You can see how far we’ve decelerated from the 6.5% reading we had in December of last year. Since June, broad inflation rates have remained in line with forecasts and have stayed within a more palatable range of 3-4%. The most recent BLS data shows November’s inflation at 3.1%.
The case for a U.S. economic surprise on the upside continues to play out, for now at least. S&P 500 companies reported healthy revenues and profits through third-quarter earnings season. Over 80% of the largest companies listed in the United States reported a positive surprise in earnings per share. GDP growth appears very healthy after a second estimate of 5.2% was published for the third quarter. Strong imports may have detracted from growth figures, but strong consumer spending and an inventory investment were the primary components driving the expansion.
Commodity markets were led by a further contraction in oil prices. A pullback in dollar strength may serve as a headwind to the asset class. Looking closer at oil markets, we observed continued strength in America’s energy industry. As OPEC+ pushes for price control through production cuts, U.S. crude oil output is hitting record highs, effectively disrupting any monopoly on energy prices. It should be noted that since 2018, America has been the top oil producer in the world, thanks to the shale revolution and technological breakthroughs in drilling efficiency.
In other news, a government shutdown was temporarily averted with funding measures extended to at least mid-January, while Moody’s adjusted the outlook on the government’s AAA credit rating from stable to negative, citing debt levels and rising interest expenses. Moody’s is the only big three ratings agency to retain a AAA rating on U.S. government debt. Fitch lowered its rating to AA+ in August, while Standard and Poor downgraded in 2011.
Momentum did contract at month end as stocks approached a key resistance area, the highs reached in late July. A pullback and retest would not be unusual here. For the S&P 500 Index, we are carefully observing price action around 4,590, 4,600. A sustained breakout above 4,600 would characterize a bullish confirmation and build support for continued advance.
While there are risks present and important to take note of, the recent shift in interest rate expectations, tolerable inflation rates, and the resiliency of corporate earnings and consumer spending look to be fueling a robust move into year end.
That’s it for this market update. Wishing you a warm season’s greetings. Thank you for watching, and we’ll see you next time.
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