Monthly Market Update – November 2024

Key Points

• STRONGER THAN EXPECTED The Fed began a rate-cutting cycle in September but may need to recalibrate the pace and magnitude of cuts due to stronger-than-expected economic growth and inflation. Recent upward pressure on prices may necessitate a more gradual approach by the Fed. 
• ROBUST ECONOMIC MOMENTUM Economic reports released in November highlight a substantial positive shift across 36 economic indicators, reflecting growth in sectors of the economy such as Manufacturing, Employment, Housing, Consumer activity, and Inflation. 
• EVOLUTION OF EXPECTATIONS The surge in economic momentum presents a significant challenge for the Fed in its efforts to control inflation, and during 2024, the market has shifted how it is pricing in Fed rate cuts through 2025 as it weighs the risks of inflation rising versus economic growth slowing.  
• BUSINESS SENTIMENT SURGES Since Trump’s election victory, American businesses have exhibited increased optimism about their future prospects, driven by anticipated pro-business policies and reduced regulatory burdens. This “Trump Bump” has been reflected across various regional Federal Reserve bank surveys.
• TARIFFS AND TRADE Not long after his victory, Trump announced intentions to impose new tariffs on goods from China, Mexico, and Canada, creating uncertainty about their economic repercussions. The tariffs from his first term significantly altered U.S. trade, with Mexico replacing China as the primary source of U.S. imports.
• REGULATION VS PRODUCTION Federal Regulations have proliferated over the last few decades and have been shown to potentially hinder economic production and growth. Studies suggest that they result in substantial job losses and reduced GDP and deregulation could bolster GDP and employment.

Market Summary

Asset Class Total Returns

Source: Bloomberg, as of November 30, 2024. 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).

Americans may have been distracted during the last few days of trading for the month of November as the Thanksgiving Day holiday closed capital markets, the second to last weekday of the month, as well as an abbreviated day of trading for the post-holiday Friday session when most Americans were seeking Black Friday deals or watching football. But tryptophan hangovers, Black Friday deals, and four days of football couldn’t stop the momentum of the stock market. The S&P 500 Index reached its 53rd record closing high of the year for the last session of the month, capping a +5.7% for the month. That was the best month for the headline U.S. index since last November, when it surged +9.1%. The S&P 500 has only been negative in two months over that 12-month span, with modest losses in just April (-4.1%) and October (-0.9%). U.S. markets kicked off November with an upbeat reaction to the Presidential election. Most of the month’s gains came in the first week, a gain of +4.7%, following a quick and decisive victory by Donald Trump in which Republicans ultimately regained the White House and Senate and retained the House. 

Some of the election euphoria faded in the second week of November, with the S&P pulling back -2%, but it went on to more than make up for that in the final two weeks of the month amid a backdrop of robust economic data and decent third-quarter corporate earnings results. Smaller companies liked the election results even more than the large-cap S&P. The Russell 2000 Index, an index of small capitalization stocks, soared +10.8% on a total return basis, highlighting a broadening of the market rally. An incoming Trump administration revives uncertainty over potential tariffs, but those concerns appear to be outweighed by the prospects of reduced taxes and a pro-growth regulatory environment. Small cap stocks tend to be more resilient in the face of higher tariffs because they are less reliant on revenues from overseas and benefit more from reduced regulation and taxes. November was the best month for the Russell 2000 since a +12.1% gain last December. All eleven S&P 500 sectors were positive in November, underscoring the breadth of the rally. The Consumer Discretionary sector led the month with a +13.3% jump, its best month since January 2023, on robust consumer spending data and reduced risk of recession. In the minutes from the November Federal Open Market Committee meeting, Federal Reserve (Fed) policymakers saw the risks of a more pronounced slowdown in the labor market or the economy as having diminished since the September meeting. With the broad rally in U.S. equity markets, the Cboe VIX Volatility Index closed the month below the 14 level, its lowest level since July. 

Overseas stocks weren’t nearly as ebullient as their U.S. counterparts. The U.S. Dollar Index gained +1.7% in November, following its biggest monthly gain since September 2022 in October (a +2.9% rise). That’s the strongest consecutive monthly gain in more than two years. The U.S. dollar rallied on the relative strength of the U.S. economy, widening interest rate differentials between the U.S. and other developed markets, and reduced expectations for future Fed cuts. A rising U.S. dollar is a headwind for non-U.S. assets. Developed market international stocks (as measured by the MSCI EAFE Index) slid -0.6% in November. While that was a modest loss relative to U.S. stocks, it was the largest monthly discrepancy, a -6.4% deficit to the S&P 500, since September 1998, and just edged out the deficit during the unfolding of the pandemic in April 2020. The underperformance was widespread, Japan advanced for just the first time in three months but just barely, with the MSCI Japan Index edging up a modest +0.7%. Europe, on the other hand, has been beaten up, with the MSCI Europe ex U.K. dropping for a second straight month, down -2.6% in November. As bad as the underperformance was for international developed markets, emerging markets were truly laggards. The MSCI Emerging Markets Index fell -3.6% in November, following a -4.3% decline in October, ending nine months of positive returns – the longest streak since October 2017. Chinese equities declined due to concerns about a future trade conflict from the incoming Trump administration and the assessment that the previously announced government support measures are not yet sufficient to overcome the domestic real estate crisis.

The strong U.S. stocks gains overshadowed decent gains for U.S. bonds. Most U.S. bond indices were up about a percent, with longer duration bonds doing even better as Treasury yields declined. The benchmark 10-year U.S. Treasury yield fell -12 basis points to 4.17% in November. The S&P U.S. Treasury Bond Current 10-Year Total Return Index gained +1.0% for the month. The Bloomberg US Aggregate Bond Index advanced +1.1% for the month and has been positive in six of the last seven months. Like their non-U.S. equity counterparts, non-U.S. bonds lagged U.S. bonds, with the Bloomberg Global Aggregate ex-U.S. Bond Index slipping -0.2%.  Central banks continued to lower rates during November. The Fed voted to lower the federal funds rate by -25 basis points (bps), as did the Bank of England. Other central banks delivering -25 bps rate cuts in November included the Czech Republic, Hong Kong, Saudi Arabia, Peru, South Korea, South Africa, and Mexico. Brazil, Columbia, New Zealand, and Sweden cut by -50bps. Argentina, operating on an entirely different rate scale, cut their rates by -5% to 35%. Whether rate cuts can continue at this pace, both in the U.S. and abroad, will be questioned as inflation begins to reassert itself. During November, inflation has reaccelerated in the U.S., in the U.K., and the eurozone. The Bank of Japan, on the other hand, is still expected to hike rates. 

Overall, November was an unquestionably positive month for capital markets in the U.S., and it’s hard not to be positive going into December, which has a high degree of positive seasonality to it, plus all the momentum of 2024 behind it, and now the growing business optimism following the November election. To be clear, a fair degree of uncertainty remains regarding the direction of domestic and foreign policy with a new administration. The re-emergence of inflation may temper monetary policy easing in the U.S. and overseas. In addition, valuations also indicate that a lot of optimism is already priced into asset prices. But if inflation can be controlled, corporate earnings continue to deliver, and economic growth can continue to chug along at a 2.5% – 3.0% pace, the market momentum can be maintained into 2025.

Source: Bloomberg. Data as of November 30, 2024.
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

STRONGER THAN EXPECTED

The Federal Reserve initiated a rate-cutting cycle in September in response to a shift in “the balance of risks.” However, recent economic data and the election outcome may necessitate the Fed revisiting this approach as both economic growth and inflation are tracking stronger than Wall Street and the Fed expected. Labor markets are more robust than anticipated by the Fed, introducing potential upward pressure on inflation. Despite a decline since 2022, the Core Personal Consumption Expenditures (PCE) Index, the Fed’s preferred inflation gauge, has recently turned back up. The more common inflation measures, the Consumer Price Index (CPI) and Producer Price Index (PPI), both experienced notable increases. Persistent housing inflation, reflected in the CPI, suggests little relief is forthcoming. While Federal Reserve Chair Jerome Powell indicated that the election would not immediately influence policy decisions, investors remain wary about long-term impacts. Potentially inflationary priorities from the Trump administration, such as immigration restrictions and tariffs, could intensify labor market inflation via wages and prices. It is expected that the Fed’s projections should acknowledge this shift to upside in inflation, and may mean a more gradual approach to rate cuts than anticipated and a higher terminal rate.

The economy looks stronger than the Fed expected

Year-over-Year growth for Core PCE (inflation) and GDP (economic growth)

Source: Bloomberg, J.P. Morgan Asset Management.
*YE24 fed funds expectations reflect market expectations for the fed funds rate after the 12/18/2024 committee meeting.

ROBUST ECONOMIC MOMENTUM

It is not just the headline inflation and economic growth indicators that are improving. Bespoke Investment Group’s Matrix of Economic Indicators shows robust momentum across a broad swath of the U.S. economy. The Matrix of Economic Indicators is a collection of 36 economic indicators across the major categories of Manufacturing, Employment, Housing, the Consumer, and Inflation. The Manufacturing/Output sector has been a laggard for years now but has shown a solid 3-month improvement. In each of those months, there have been at least an equal number of indicators showing positive momentum as those showing negative momentum, and for the October data (mostly reported in November), all but two components had positive momentum. Sentiment in the non-manufacturing sector has been strong, with the October readings surging to a multi-year high and expected to continue higher with November’s post-election reports coming in December. Breadth in the Employment sector was evenly split for October data, essentially a net wash overall, with 3 indicators improving, 3 declining, and 1 flat. Housing was the only sector of the November matrix where more indicators showed negative progress. Building Permits and Housing Starts both showed notable weakness, but that may have been hurricane related. Existing and Pending Home Sales, however, both showed notable improvements even with stubbornly high mortgage rates. Inflation hasn’t been quite the concern to markets that it was two years ago, but the Fed can’t declare victory yet.  All eight of the Inflation reports for October showed acceleration in their year-over-year rate of change, which hasn’t happened since February 2022. More concerning, though, is that the core readings are all higher than the headline readings (the core readings strip out the more volatile food and energy items). That suggests a stickier underlying inflation trend, which would complicate the Fed’s job. That will be an important trend to watch in 2025. Regarding the Consumer, those seven indicators also ran the table with sequential improvements. Consumer Confidence and Consumer Sentiment measures have both surged, and Personal Income and Spending have strong momentum. Retail Sales and Auto Sales are both accelerating into year-end. The net positive 17 improving indicators is the highest level in over a year.

Strongest Overall Economic Momentum in Over a Year

Net Number of Economic Indicators Accelerating Year-over-Year (2000 – 2024)

Source: Bespoke Investment Group.

EVOLUTION OF EXPECTATIONS

One negative about the surge in economic momentum is that it is making the Fed’s job of reigning in inflation tougher. As mentioned, one of the strongest sectors of momentum was inflation, where all eight indicators showed acceleration on a year-over-year basis. The market remains split on whether the Fed will cut interest rates 25 basis points at the upcoming meeting on December 18. The Fed itself has seen its expectations bounce around as the inflation and growth concerns have shifted. 2024 can be divided into four distinct phases of varying levels of concern about inflation and growth. Remember when markets were briefly pricing an emergency Fed rate cut at the start of August? It’s a reminder that rate-cutting processes rarely follow the nice straight lines that Wall Street likes to interpolate into the future. Like the stock market, the pricing of Fed rate cuts tends to be a bit of a roller coaster, too. The Fed’s dual mandate, whereby it also has to maximize employment, is a complicating consideration to reigning in inflation. In that respect, the Friday, December 6 jobs report will be heavily scrutinized. Last month’s paltry 12,000 non-farm payroll growth was considerably weaker than expected, even when factoring in the negative impact of Hurricane Milton. Airline strikes, predominantly at Boeing, also subtracted from payrolls last month. All these factors should reverse to a large extent in the November data reported on Friday morning. Another weak jobs report could swing the market back to the “growth scare” phase but to the contrary, an exceptionally strong report will further inflation fears.

Market Pricing of Anticipated Fed Fund Rate Cuts Were a Roller Coaster in 2024

December 2025 Fed Funds Futures Pricing and Core PCE Price Index

Source: Macrobond, ING.

BUSINESS SENTIMENT SURGES

Surveys since Donald Trump’s election victory show American companies are growing more optimistic about their prospects in anticipation of more pro-business policies and less regulatory burden. Optimism in various regional Federal Reserve banks and other surveys show strength in the “Trump Bump” that began with a stock market rally following the November 5 election. Many Wall Street economists have expressed some trepidation about potential economic fallout from tariffs Trump has threatened to impose on imported goods, but results of several Fed manufacturing surveys published since the election have been much more enthusiastic.  The New York Fed’s Empire State manufacturing index surged in November by the most since June 2020. Subsequent reports revealed factories and service producers expressing the most optimism in years toward the short-term outlook for capital spending, sales, and general business activity. The Philadelphia Fed’s district showed the outlook for business activity, and orders advanced to the highest levels since mid-2021. In the Kansas City Fed region, six-month expectations and the outlook for capital spending were the strongest since 2022. Producers in Texas, meanwhile, were more upbeat about business activity than at any time in the last three years. In the area covered by the Richmond Fed, services revenue expectations advanced to the highest in data back to 2011. U.S. homebuilders are expressing more optimism about the potential for a more friendly business climate. A National Association of Home Builders/Wells Fargo index of industry sentiment hit a seven-month high in November, while an index of sales expectations rose to the highest level since April 2022. Even sentiment among American farmers brightened considerably as the Purdue University-CME Group expectations barometer for the agriculture economy surged in November to the highest level since April 2021.

Businesses Growing More Upbeat

Outlooks for general business activity are firmer in several Fed districts

Source: Bloomberg, Federal Reserve banks of New York, Philadelphia, and Dallas.

TARIFFS AND TRADE

It didn’t take long following Donald Trump’s election victory for him to post several social media threats to U.S. trading partners about potential tariffs. Trump vowed to slap an additional 10% tariff on goods from China and 25% on all products from Mexico and Canada, as part of his quest to secure the U.S. border and quell the illegal drugs flowing into the U.S. A big unknown is whether China will reprise their playbook used during Trump’s first term trade war. Market reaction was swift as the U.S. dollar rallied and Canada’s currency hit a four-year low. The Mexican peso and Chinese yuan dropped as well. European and Asian stock markets fell in November as U.S. markets rallied. Traders around the world are now bracing for ever more volatility. The economic impact of tariffs can be difficult to assess. They can stimulate employment by attracting investment as companies try to get around tariffs by moving factories to the taxing country. However, they can also provoke retaliatory tariffs that cost jobs in other parts of the economy.

It has been difficult to sort through the effects of tariffs in Trump’s first term because of the much larger shock to supply chains as a result of the Covid-19 pandemic that shut down global economic activity shortly after the U.S.-China trade war began. The combination of the first-term trade war and the pandemic has dramatically changed the U.S. trade. China is no longer the main source for U.S. imports, Mexico took that over in 2023. Canada has also seen its share for U.S. imports increase, though not nearly the increase as Mexico. Companies of all sizes have moved production away from China to other manufacturing hubs such as Mexico, Vietnam, Taiwan, and Malaysia. The Biden administration maintained the Trump tariffs and raised more of them in 2024 on goods worth an additional $18 billion (beyond the approximately $380 billion Trump levied in 2018 and 2019). The enthusiasm for tariffs spread to the European Union as well, who voted in early October to impose duties as high as 45% on electric vehicles from China (China has threatened to retaliate against European products).

Trump’s Tariffs on China Changed U.S. Trade

Share of U.S. imports by country

Source: Census Bureau, The Wall Street Journal.

REGULATION VERSUS PRODUCTION

The Code of Federal Regulations (CFR) is the codification of the general and permanent rules promulgated by the departments and agencies of the federal government. The number of total pages published in the CFR annually provides a sense of the volume of existing regulations with which American businesses, workers, consumers, and other regulated entities must comply. Some studies have tried to quantify how regulatory restrictions slow the rate of innovation by creating barriers to market entry and what the cost to the economy is from them. Research by the Phoenix Center for Advanced Legal & Economic Public Policy Studies found that for every bureaucratic, 138 private sector jobs are lost per year, and U.S. GDP is depressed by $11 million annually. The paper further found that a 10% cut in the regulatory budget (around $5.6 billion) could boost GDP by $244 billion annually and create 3 million private sector jobs. A study published in the Journal of Economic Growth found that between 1949 and 2005, the accumulation of federal regulations slowed U.S. economic growth by an average of 2% per year. Had the amount of regulation remained at its 1949 level, 2011 GDP would have been about $39 trillion—or three and a half times—higher. A World Bank study found that moving from the 25 percent most burdensome to the 25 percent least burdensome regulatory environment (as measured by the World Bank’s Doing Business index) can increase a country’s average annual GDP per capita growth by 2.3 percentage points. Like the impact of Tariffs, it would be difficult to isolate and empirically test these findings in real-world conditions. But just as tariffs represent a potential downside wildcard for the new administration, the potential for deregulation could provide an upside counterbalance to private economic growth.

Is Regulation Constricting Economic Production

Total Pages Published in the Code of Federal Regulations

Source: Regulatory Studies Center, govinfo.gov for years 2022 and onward; Federal Register Statistics for prior years. Updated July 2, 2024.

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 “60/40 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.