Market Update—Month Ending November 30, 2023
Posted December 7, 2023
- Markets Rebound in November
- Strong Month for Fixed Income
- Signs of Soft Landing
- Risks Remain Despite Market Rally
- Outlook Remains Positive
Markets Pull Back in August
Equity markets fell in August as investors pulled back from riskier investments. The S&P 500 lost 1.59 percent, the Dow Jones Industrial Average lost 2.01 percent, and the Nasdaq Composite dropped 2.05 percent. Despite the modest August declines, all three major U.S. indices remained in positive territory for the quarter and year-to-date.
Market fundamentals continued to show slowing earnings growth. As of August 31, with 99 percent of companies having reported actual earnings, the blended earnings decline for the S&P 500 was 5.8 percent in the second quarter, according to Bloomberg Intelligence. Although this is better than the 9 percent drop anticipated at the start of earnings season, it was the largest quarterly earnings decline since the third quarter of 2020. Over the long run, fundamentals drive long-term performance, so weakening fundamentals are worth watching in the quarters ahead.
Technical factors were supportive, with all three indices finishing August well above their 200-day moving averages for the eighth consecutive month. The 200-day moving average is a widely followed technical signal; prolonged breaks above or below this level can signal shifting investor sentiment. Continued technical support was a positive signal that investors remain bullish on long-term prospects for the U.S.
International markets also saw losses. The MSCI EAFE Index fell 3.83 percent and the MSCI Emerging Markets Index tumbled 6.13 percent, bringing both below their respective 200-day moving averages by the middle of the month. The MSCI Emerging Markets Index ended August below its 200-day moving average, whereas the MSCI EAFE Index finished above trend thanks to a late-month rally.
Mixed Month for Fixed Income
Although results were negative across the board for equities, fixed income returns were mixed. Rising rates continued to weigh on investment-grade bonds during the month; the 10-year U.S. Treasury yield rose from 3.97 percent at the end of July to 4.09 percent at the end of August. The Bloomberg U.S. Aggregate Bond Index lost 0.64 percent.
High-yield fixed income, on the other hand, had a positive month. The Bloomberg U.S. Corporate High Yield Index gained 0.28 percent as high-yield bond returns were supported by falling credit spreads. Spreads reached 4 percent in mid-August before ending the month at 3.85 percent.
Signs of Slowing Economic Growth Ahead
Economic growth may be set to slow in the second half of the year. Consumer and business confidence pulled back as rising concerns about the health of the economy weighed on consumers and business owners. As shown in Figure 1, service sector confidence fell in July and remains below highs from earlier in the year and throughout much of 2022.
Source: Bureau of Labor Statistics/Haver Analytics
One of the major questions for the economy and markets this year was if tighter monetary policy from the Fed would successfully lower inflation without bringing the economy into a recession. Based on the recent updates it seems that the economy is heading toward a soft landing, which is a good sign for investors as slower growth and lower inflation is the target outcome that the Fed has been working toward throughout the course of the year.
Inflation and the Fed will continue to be worth monitoring as there is still real work to be done to get inflation back down to the Fed’s 2 percent target. The updates in November showed we are on the right path. Looking forward, the economic slowdown, along with continued weakness in the housing sector, is expected to contribute to further improvements on the inflation front.
- Signs of continued slowing economic growth in November.
- Progress combating inflation points toward the prospects of a soft landing.
Risks Remain Despite Market Rallies
Despite the positive month for the economy and markets there are real risks that remain to the outlook.
We may see an increase in inflation in the months ahead, especially if volatile food and energy prices rise. Additionally, it’s possible that the slowdown will accelerate, and we could see a more challenging economic backdrop for markets in 2024. While neither of these scenarios appear to be the most likely outcome at this time, they are both worth monitoring given the impact they can have on markets.
Geopolitical risks are also worth paying attention to given the rise in uncertainty that we’ve seen this year. The continued conflicts in Ukraine and the Middle East have the potential to lead to further regional instability and could negatively impact global markets if there is further escalation. The slowdown in China is another area to monitor as we head into the new year due to the importance of the country for global growth.
And, of course, there are always the unknown risks that could pop up at any time to negatively impact investors. As we saw earlier this year with the regional bank failures and potential government default, these risks can appear suddenly and have a meaningful short-term impact on markets.
- Inflation and the Fed are real risks for investors despite the progress we’ve seen this year.
- Rising geopolitical uncertainty should be monitored as we head into the new year.
Outlook Remains Positive
Despite the real risks that remain, the outlook for markets and the economy remains positive. The return to earnings growth in the third quarter was an encouraging sign that businesses were able to take advantage of the positive economic background during the period. The drop in interest rates last month should only help going forward as lower rates feed into valuations and provide lower financing costs for businesses and consumers.
While we have seen signs of slowing economic growth, the reports largely paint the picture of a soft landing rather than an imminent recession. Markets reacted positively to the signs of slower but potentially more sustainable growth during the month, and we may see further market appreciation to finish out the year given the positive momentum heading into December.
Ultimately the economic and fundamental backdrop for markets appears to be in a sweet spot, with a soft landing and a return to earnings growth setting the stage for potentially positive performance ahead.
That said, short-term risks remain to the market and economy that could lead to further volatility. It’s important to remember that short-term market disruptions are a normal part of the market cycle and that successful financial planning consists of creating well-diversified portfolios that are set to withstand various market environments.
As the Nobel Prize-winning economist Harry Markowitz once reportedly quipped, “Diversification is the only free lunch,” in investing. While diversification does not assure a profit or protect against loss in declining markets, nor can it guarantee that any objective or goal will be achieved, we believe creating portfolios that take advantage of the benefits of diversification and match investor goals with timelines, investors can withstand periods of short-term volatility and benefit in rising markets. As always, if concerns remain you should speak to your financial advisor to discuss how your financial plan can help your portfolio withstand uncertain times.
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.
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