After three months of declines, the market rallied in November, reversing off the October lows to post its best month of the year. For the month, the S&P gained 8.92%, the DOW advanced 8.77%, small caps increased 7.98% and the NASDAQ ripped 11.3%. S&P 500 equal weight (RSP) gained 10.8% and bonds rallied 4.5%. The rest of the developed world (CWI) advanced 8.2%. Large cap growth (IWF) and large Cap value (IWD) rallied 9.7% and 7.5% respectively. This was a broad-based rally that carried the S&P higher than the July 31 peak as well as erasing the declines from August, September and October. What a difference a month makes!
80% of the S&P’s 8.9% rally occurred during the first two weeks of the month but continued to drift upward during the back half.
Given we started the month with a small cash position (around 10%) coming out of an otherwise down October, TWG models slightly lagged their benchmark, but still saw productive gains.
For the month, TWG Growth, Moderate and Conservative gained 7.5%, 6.3% and 5.6% respectively.
WHAT MOVED MARKETS:
Early November there were positive developments to the economic backdrop as well as the major market index. First, the treasury announced their future bond auction levels, which came in lower than expected. This reduction in future issuance of treasuries could help address the glut of supply that was part of the spike in yields over the past two months. Accordingly, treasury yields retreated down to 4.5% after briefly topping 5% in mid-October.
The Fed held rates steady during their policy meeting on November 1st. While Powell did not say anything new or novel, the market is betting on the Fed being done raising rates, which created a renewed sense of optimism that peak rates are here and now. The main take away, in our view, was Powell stating, when asked if he thought the Fed had done enough tightening to bring inflation down to 2%, he responded “we’re not confident that we haven’t but we’re not confident that we have.”
Next, a few economic indicators showed a slowdown in economic activity. First, continuing unemployment claims ticked up, implying that those that have been laid off are finding it harder to land another job. The job openings (JOLTS) report indicated a slowdown in hiring, as well as a reduction in the past two months’ job openings. This points to a softer labor market, indicating a slowdown in employment. We may now be moving to a “bad news is good news” period where signs of a slowdown (spending, jobs, higher unemployment, etc) could suggest rate cuts are closer than previously thought. Yields continued to crater, thus creating a tailwind to risk assets.
In the middle of the month, October CPI/inflation came in flat month over month, softer than the expected .1% rise, and easing from the .4% rise in September. Core CPI (excludes food/energy) decelerated to a .2% climb in October. Year-over-year, headline inflation slowed to 3.2% and core CPI slowed to 4%. The market rallied 2% on the news, bringing the S&P 500 above 4500 for the first time since early September. This post CPI rally also helped the S&P recoup the September and October declines and was within 2% from the 2023 high made in late July.
In our view, market participants have been worried about a potential recession for the last year but have started dialing back their recession bets as inflation continues to cool and prospects for a less hawkish Fed have grown.
PORTFOLIO POSITIONING
As mentioned, we entered the month with a small cash position resulting from the ongoing declines in October. As the market bottomed out on October 27th we were still jockeying between COWZ and QQQ/SPLG. As the market took off, we systematically repositioned COWZ to QQQ and, to a lesser extent, SPLG (S&P 500). By the end of the month, we reduced our large value exposure from 16% to 5%, increased large growth exposure from 46% to 53%, and increased the S&P 500 position from 4% to 16%. Utilizing the cash and proceeds from COWZ, the month end allocation narrowed to QQQ and S&P500 as our two largest equity positions, with smaller positions in IWF (Russell 1000 growth) and VTV (vanguard value).
LOOKING AHEAD:
As we enter the final month of the year, we are optimistic that the rally can continue into year-end but are cognizant that the surge in November may have pulled forward some of the expected rally into the end of the year (the santa rally). However, on the margin, we think there is relative support of large cap tech, as investors will be better served to take profits from the year’s best performers in January as opposed to December (to defer tax liability a full year) as well as fund managers chasing returns which may result in buying the years winners to be able to report ownership at the end of the year.
The notable economic indicators that we previously mentioned are supportive of the end of rate hike narrative, and a gradual slowdown in economic activity is welcome. Since the slowdown has been measured and orderly, we think the Fed will take comfort that their rate increases are doing what they intended – to slow down demand, and thus continue to bring inflation to its 2% target. The trend of declining inflation has not been interrupted and continues to abate. That, along with a slightly weaker job market, the fact that there has not been mass layoffs, nor a credit event, points to an increase in the odds of a soft landing.
But there is still more work to be done in the battle against inflation. The “final mile” of inflation falling to 2% from 3.x% is the hardest change to achieve. Thus, we don’t think it’s yet safe to declare victory on inflation.
During the market surge this month, we have observed a notable broadening of market participation. More stocks are perking up which could lead to a potential “catch up” trade. We welcome an environment where the leadership in the market is not as narrow as it has been all year. While large cap tech has had a great year return wise, most other stocks have been flat or lagged the broad market. These other stocks are trading at fair multiples, are not expensive relative to historical valuation, and, with further investor confidence, can potentially be the impetus to keep the market moving up and to the right.
Whatever trend changes that may occur as we turn the calendar, or even if this year’s winners continue to win in 2024, we have sufficient options of funds to access every corner of the market and will ultimately increase exposure to the areas of the market that are showing the most productivity.
Our next note will occur in January, so we wanted to take a moment to wish you a happy holiday season. We hope you have a restful, festive, and happy new year.
