An old market adage says, “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, 8.9%. The move nearly retraced the 10% downturn from August through October. Low volatility levels reinforced bullish sentiment. As measured by VIX, also known as the “fear gauge,” implied volatility dipped to pre-pandemic lows.
Investor confidence stretched far and wide. The broad-based rally made gains in every sector except energy. Even emerging markets and small-cap stocks joined in the rising tide.
The silver lining in November’s upturn was fixed income. Yields contracted as the Fed telegraphed a potentially more dovish policy path forward. With the bond market giving its best monthly return in more than 10 years, this rally became the broadest of its kind year-to-date.
FSA responded to the move, deploying most of the cash raised since the late summer sell-off.
Underpinning the market’s about-face can be largely attributed to the pause in Fed rate hikes. Inflation data has remained in the 3-4% range since May. With inflation tempered and closer to the 2% long-term goal, many investors have interpreted a downshift in hawkish policy from central bankers.
Corporate earnings season for Q3 ended on a good note: 82% of S&P 500 companies reported a positive earnings (profits) surprise, and 62% reported a positive revenue surprise.
The estimate for third quarter economic growth (GDP) for the overall economy is at a strong level of 5.2%. Consumer spending and inventory investment were the main components contributing to growth. Imports, a negative to GDP growth, were also higher.
Commodities were the laggards, led by further contraction in a two-month slide in oil prices. A pullback in dollar strength served as a headwind to the asset class. As OPEC+ pushes for a price boost through production cuts, U.S. crude oil output hits record highs. Since 2018, the U.S. 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. Rating agency Moody’s adjusted the outlook on the US government’s pristine triple-A credit rating from “stable” to “negative,” citing debt levels and rising interest expenses. It is the last of the big three rating agencies to retain a triple-A rating on US government debt. Fitch Ratings lowered its rating to AA+ in August, while Standard & Poor made its downgrade in 2011.
Resistance Overhead
Momentum did contract at month-end as stocks approached a key resistance area — the highs reached in late July. A pullback and re-test would not be unusual here. For the S&P 500 Index, we are carefully observing price action around 4590. A sustained breakout above 4600 would characterize a bullish confirmation.
While the risks discussed are present and important to take note of, the recent shift in interest rate expectations, tolerable inflation, and the resiliency of corporate earnings and consumer spending are fueling a robust move into year-end.
Wishing you a warm season’s greetings. Please remember to inform your advisor of any changes in your life that might affect your investment objectives and how we manage your money.
Jordan Daugherty, CFA
Investment Analyst
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