Monthly Market Update – November 2023

Key Points

• November to Remember Like the ’70s hit single “Every 1’s a Winner”, virtually all major asset classes had their groove on in November, and everybody was a winner. The collective cross-asset return for eight major asset classes was the second-strongest November performance in decades and the fourth-best single month overall.
• Yields See a Sharp Reversal At the end of October, the benchmark 10-year U.S. Treasury yield was riding a six-month streak of gains and crossed 5% for the first time in 16 years. But the streak ended in November as Treasury yields reversed sharply, with the 10-year yield falling back to 4.3%, helping to fuel the cross-asset rally. 
• Revised Up, Revised Down U.S. economic growth for the third quarter was hotter than initially reported in the advanced estimate. Gross Domestic Product (GDP) grew at a +5.2% annual rate, up from the initial estimate of +4.9%. Meanwhile, throughout 2023, Nonfarm Payrolls (NFP) job growth has been consistently revised lowered from the initial release.
• Retail Fail The advance read on Retail Sales saw the first decline since March, falling -0.1% for the month. Auto sales and gasoline sales both contributed to the decline. But even excluding autos and gas, retail sales were up only modestly and down meaningfully from the prior six months. This was yet another sign of slowing economic activity and more evidence to keep the Fed from hiking interest rates further.   
• Double Downgrade In early November, Moody’s Investors Service cut their outlook on the U.S. government credit rating to negative from stable, citing their view that the downside risks to U.S. fiscal strength have increased and may no longer be fully offset by its unique credit strengths. In early December, Moody’s also cut its outlook for Chinese sovereign bonds to negative from stable, citing China’s usage of fiscal stimulus to support local governments and its spiraling property downturn.
• More Seasonal Strength The typical seasonal tailwinds alluded markets in October and then come in spades in November. But historically, December is the best month of the year. According to Bespoke Investment Group analysis, since 1945, the S&P 500 has gained an average of +1.55% in December which is tied with April for the best month of the year. 

Market Summary

Asset Class Total Returns

Source: Bloomberg, as of November 30, 2023. Performance figures are index total returns: US Bonds (Barclays US Aggregate Bond TR), US High Yield (Barclays US HY 2% Issuer-Capped TR), International Bonds (Barclays Global Aggregate ex USD TR), Large Caps (S&P 500 TR), Small Caps (Russell 2000 TR), Developed Markets (MSCI EAFE NR USD), Emerging Markets (MSCI EM NR USD), Real Estate (FTSE NAREIT All Equity REITS TR).

November saw substantial and broad-based gains across most major asset classes. Signs of falling inflation and economic moderation sparked a bond rally that drove the yield on the benchmark 10-year U.S. Treasury note down to 4.33% after having surged to above 5% in late October after advancing for six straight months. It was the benchmark yield’s biggest monthly slide since 2019. Data releases throughout the month largely supported the view that central banks have reached the peak of their tightening cycles, fueling a global rally for both bonds and equities.

When bond yields fall, bond prices rise, and the widely tracked Bloomberg U.S. Aggregate Bond Index jumped +4.5% for the month, representing the biggest monthly gain for the index since the mid-1980s. German Bunds and UK Gilts also saw significant yield declines, so non-U.S. bonds soared as well, with the Bloomberg Aggregate Global Bond Index ex U.S. up +5.5% in November. International bonds were boosted not just by the decline in sovereign bonds yields but also from a -3% slide in the U.S. dollar over the month.

Stock investors were also thrilled by the prospect of the end of rate hikes and the growing potential for cuts. All three major U.S. stock indexes ended November higher than +8%, snapping three-month losing streaks. The S&P 500 Index jumped +8.9% in November, its best monthly performance since returning +9.1% in July 2022. Small cap stocks weren’t far behind, with the Russell 2,000 Index gaining +8.8% for the month, its best showing since surging +9.7% in January. But the areas generally most sensitive to borrowing costs were the big winners in November. Information technology companies, in particular, were strong, with the S&P 500 Technology sector’s +12.7% return topping all sectors. That helped propel the tech-heavy Nasdaq Composite +10.7% in November.

Other interest rate sensitive sectors of the economy also showed strength. The S&P 500 Real Estate sector index was up +12.3%, and the FTSE NAREIT All Equity Real Estate Index gained +11.9% in November, the best single month since October 2011. The S&P 500 Financial sector index was up double-digits too, with a +10.7% return.

Like fixed income, the gains certainly weren’t limited to the U.S. as developed market international stocks (the MSCI EAFE Index) bested the S&P 500 with a +9.1% gain, its best performance since November 2022. Emerging market stocks (the MSCI Emerging Markets Index) were the laggards but still up a solid +7.9% in November.

The market was particularly encouraged by the release of the U.S. Consumer Price Index (CPI) for October, which showed inflation cooler than expected at both the headline and core (which strips out food and energy) levels. The biggest driver of the decline was a fall in energy and gasoline prices, followed by lower travel costs and hotel rates. The November Federal Open Market Committee rate decision meeting minutes showed that the Fed is committed to hold policy rates at elevated levels for an extended period, but several Fed policymakers, including Chairman Powell, made public comments that investors interpreted as dovish and convinced that the Fed will be cutting rates sooner rather than later. Weaker jobs data, a drop in retail sales, and ho-hum manufacturing data all reinforced the market’s conviction that central banks are done with tight monetary policy, which helped sustain the global asset rally throughout the month. 

Source: Bloomberg, as of November 30, 2023.
Price Returns for Equity, Total Returns for Bonds.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Quick Takes

NOVEMBER TO REMEMBER

British band Hot Chocolate released their chart-topping groove single “Every 1’s a Winner” in 1978. In the decades since there haven’t been many better months for diversified investors than November 2023. Risk assets around the world got their collective groove on, and virtually everybody was a winner. Every month, we show the performance of eight major asset classes near the top of this market update. Occasionally, we have to endure months in which all asset classes are down, just like October was, and there are months when all asset classes are up, like November. But we don’t often see all asset classes up to the degree they were in November! It was the second-strongest November in three decades and the fourth-single-best month overall for the collective performance of these eight major asset classes. The rally dramatically changed the market picture for most trailing time periods, with only U.S. small caps and U.S. real estate still negative for the trailing one year. That’s quite a contrast from 2022, when all these asset classes were down by double-digits, and a good reminder of why the old axiom “it’s time in the market, not timing the market” holds true for long-term investors. 

November’s Risk-On Rally Swept Across Asset Classes

Cumulative Return on Broad Asset Classes is 4th Best (1993 – 2023)

Source: Bloomberg.

YIELDS REVERSE SHARPLY

After climbing for six consecutive months, the benchmark 10-year U.S. Treasury yield fell 60 basis points in November, ending at 4.33%. A big contributor to the decline in yields was a fair amount of dovish talk by Federal Reserve officials. As expected, the Fed held its policy rate steady at 5.50% at the November FOMC meeting, but in his post-decision press conference, Chairman Powell comments were interpreted by investors as more dovish than expected. He noted that the risks of over- versus under-tightening were now more balanced. Additionally, softer-than-expected inflation data and jobs growth further depressed yields as investors became convinced it would be sufficient to keep the Fed from hiking rates further. 

Yields Touched 5%… then Quickly Retreated

10-Year U.S. Treasury Yield Sharply Reversed from Months-Long Surge

Source: Bloomberg.

REVISED UP

U.S. economic growth for the third quarter was hotter than initially reported in the advanced estimate, which we reported here last month. Real Gross Domestic Product (GDP), the government’s main measure of economic activity in the U.S., grew at a +5.2% annual rate, up from the advance estimate of +4.9% and the +2.1% reading in the second quarter. The GDP increase marked the biggest gain since the fourth quarter of 2021 and the biggest increase in a decade if the pandemic years are excluded. However, the upside revision didn’t exactly come from the right places. Personal Spending was revised down from +4.0% to +3.6%. That’s still up materially from the +0.8% in Q2, but not the desired direction for a revision. On the other hand, Government Spending was revised higher from the +4.6% originally reported to +5.5%, nearly 20% contribution to the overall GDP growth in Q3. Long-term sustainable economic growth generally comes from higher consumer spending and lower government spending.

U.S. Real Gross Domestic Product

Annualized percent change from previous quarter

Source: CNBC.

REVISED DOWN

And down. And down. And down again. Every month, the U.S. Bureau of Labor Statistics releases the highly anticipated Employment Situation report that shows total Nonfarm Payrolls (NFP) job growth, as well as the Unemployment Rate, Average Hourly Earnings, Average Weekly Hours Work, and other labor market data.  2023 has seen a recurring pattern in the report in which the initial NFP jobs growth numbers are overestimated and require downward revisions. So far, NFP jobs have been revised down in 8 of 9 months. The only upward revision came in July due to government jobs. Without the government jobs added, the July NFP number would have also been revised down. In other words, private nonfarm payrolls were revised down every month this year, something that historically has only happened in or near recessions.

2023 will be 1 of the 3 Worst Years for Downward Revisions to Jobs

Full Year NFP Revisions (Sum of Monthly Changes)

Source: U.S. Bureau of Labor Statistics, Hedgeye.

RETAIL FAIL

The Commerce Department reported that the October advance read on Retail Sales saw the first decline since March, falling -0.1% for the month. That was above expectations for a -0.3% decline, but it was far below the +0.9% increase in September and broke a six-month streak of advances. Auto dealers posted a -1% decline in sales to weigh down the headline number (Auto sales account for about 20% of all retail sales). Receipts at gasoline stations also slipped due to cheaper gas prices and less demand after the end of the summer driving season. Sales ex-autos and gas were positive, up +0.1%, but also well below the prior month’s +0.8%. Retail sales represent about one-third of all consumer spending and are seasonally adjusted but not inflation-adjusted. So slower spending in part reflects the cost for many goods that have fallen in recent months (like gasoline). The soft sales data bolsters the case for the Fed to hold off on further rate hikes at its meeting next month.

Retail Sales Fall for First Time Since March

U.S. retail sales, change from prior month

Note: Seasonally adjusted
Source: U.S. Census Bureau via St Louis Fed, The Wall Street Journal.

DOUBLE DOWNGRADE

Two notable downgrades to country outlooks book-ended November. In early November, in a surprise move, Moody’s Investors Service cut their outlook on the U.S. government rating to negative from stable. The primary rationale for the negative outlook change was Moody’s view that the downside risks to U.S. fiscal strength have increased and may no longer be fully offset by its unique credit strengths. Importantly, Moody’s retained its top rating, Aaa, on U.S. credit. Days after the month ended, Moody’s cut its outlook for Chinese sovereign bonds to negative from stable while retaining a long-term rating of A1 on the nation’s sovereign bonds. Moody’s cited China’s usage of fiscal stimulus to support local governments and its spiraling property downturn that is posing risks to their economy. Cities and provinces across China have accumulated a massive amount of hidden debt following years of unchecked borrowing and spending, with the International Monetary Fund and Wall Street banks estimating total outstanding off-balance-sheet government debt is around $7 trillion to $11 trillion. The cuts to the outlooks for the U.S. and China underscores the deepening concerns about debt levels in the world’s two largest economies. 

Moody’s Lowers Outlook on credit rating for U.S. and China

Government Debt as a Percentage of GDP

Source: The Wall Street Journal.

BEST TIME OF THE YEAR

The typical seasonal tailwinds alluded markets in October and then came in spades in November. But historically, December is the best month of the year. According to Bespoke Investment Group analysis, since 1945, the S&P 500 has gained an average of +1.55% in December which is tied with April for the best month of the year. And December has a high batting average as well, with positive returns three quarters of the time in December. They do note one caveat, though, two of the three Decembers where the S&P 500 has declined worse than -5% both occurred in the last five years (-9.3% in 2018 and -5.9% in 2022). But one aspect of December’s performance that bodes well for this year is the fact that average performance improves based on how the market performed in the first eleven months of the year. The S&P averaged gains higher than the 1.55% long-term average when the year to date gains through November were positive. This will be the fifth time since 1983 that the S&P 500 was up at least +15% through November and more than +5% in November. The prior four years were 1985, 1996, 1998, and 2009. Of those four years, the S&P 500 was positive in December three out of four times. 

Season’s Greetings from the S&P

S&P 500 Average Monthly Performance: 1945-2023

Source: Bespoke Investment Group.

Asset Class Performance

The Importance of Diversification. Diversification mitigates the risk of relying on any single investment. It offers many long-term benefits, such as lowering portfolio volatility, improving risk-adjusted returns, and helping investments to compound more effectively.

Source: Bloomberg.
Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different from the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by: 30% US Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Chris Bouffard is CIO of The Retirement Planning Group (TRPG), a Registered Investment Adviser. He has oversight of investments for the advisory services offered through TRPG.

Disclaimer: Information provided is for educational purposes only and does not constitute investment, legal or tax advice. All examples are hypothetical and for illustrative purposes only. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed. Please contact TRPG for more complete information based on your personal circumstances and to obtain personal individual investment advice.