Market Memo | November 2023

November certainly gave investors reasons to give thanks.

The S&P 500 stock index and the Bloomberg Aggregate Bond index both climbed higher in the month, up 9.13% and 4.53%, respectively. Small company stocks had a strong month, with the Russell 2000 Index up 9.05%. Foreign stocks in Developed and Emerging Markets also powered higher for the month. Investors are left wondering if Santa came early this year—or if there are gifts still to be delivered.

On the nice list were declines in long-term interest rates, which helped propel both bond and stock returns higher.

The decrease in long-term yields was prompted by slowing economic activity, such as lower job openings, slower hiring, rising unemployment, and importantly, decreases in inflation readings. Investors continue to cheer bad news for the economy as a sign that inflation will continue to abate, leading to lower interest rates. For the month, investors were right. Gold also enjoyed a significant price increase. Our positions in gold had positive momentum due to decreasing rates, increased geopolitical instability, and buying from central banks around the world.

On the naughty list was slowing global growth, geopolitical tensions amplified by the wars in Ukraine and Gaza, above-target inflation, and growing debt.

At some point, the current state of bad news for the economy (and simultaneously good news for the market) could flip to bad news all around. If the economy can thread the incredibly tight needle of being able to slow down just enough to not slip into recession, returns could be strong in almost all asset classes. However, if global growth continues to slow, led by trouble in China’s economy and slowing in Europe, the US markets will not be completely immune.

Indicators for the future path of the economy and markets are sending conflicting signals with some indicating a healthy economy and markets, while others are indicating a recession is not only possible, but probable. Unemployment has been creeping up by 0.50% and has historically preceded a recession. However, the current unemployment rate is still historically low, while the labor force participation rate is also at decade lows. It’s hard to have a recession when just about everyone has a job.

The money supply is decreasing.

The last few times in our Country’s history this has happened, the Country experienced panic and a depression. However, the money supply has never grown as quickly as it has in the past three years, increasing by over $5 trillion, and the roughly 30% decrease in money supply seen during the Great Depression is still far away. It is worth noting that a good portion of the M2 money supply decrease results from investors moving cash into CDs and time deposits above $100,000. Cash may unlock again at some point in the future as the CDs and other time deposits mature.

For better or worse, the Federal Reserve did not exist to guide monetary policy during the last monetary contractions. There are many conflicting signals on both ends of the spectrum, signaling either lumps of coal in investor stockings or happy Holidays ahead.

With inflation continuing the downward trend and oil prices continuing to fall, it’s hard to see the need for any further rate increases from the Fed this month.

The broadening positive returns of the stock market in the US with banks, real estate, and health care companies all enjoying positive returns, is also something to carol about.