November Market Review and December Market Outlook

Last Month in the Markets: November 1^st – 30^th, 2023 

What happened in November?  

November was an exceptionally strong month for financial markets, driven by a growing sentiment of substantial rate cuts in 2024 and further fueled by the smaller than expected US Treasury debt issuance. This included a strong performance in both US investment grade and global government bonds.  

For Equities, the major American indexes were led by the NASDAQ, with a 10.5% increase, the Dow and S&P 500 rose nearly 9%. The Euro Area, represented by the Euro Stoxx 50 index, closely followed behind with a return of just below 8%, followed by the TSX and Japanese markets, gaining just under 6%. The Chinese and UK markets lagged, ending flat to slightly negative.  International stock performance was helped by a depreciation in the US dollar, showing its counter cyclical nature and reflecting the rate cutting sentiment.  

While November saw a temporary calming of geopolitical conflict, gold continued to perform well, reflecting that underlying tensions remain. President Biden and Chinese President Xi met in San Francisco ahead of the Asia Pacific Economic Cooperation summit to thaw relations between the two countries.  A U.S. government shutdown was averted mid-month after passing a bipartisan spending and debt bill.  The war between Hamas and Israel paused to allow humanitarian aid into Gaza, and a hostage/prisoner exchange.

Other commodities were more muted, industrial metals were flat over the month and oil fell on short term supply and demand dynamics. The supply disruption from the Israel and Hamas war cooled over the month and traders turned their attention to slowing demand concerns while reacting skeptically to the voluntary oil output cuts agreed on by OPEC+.  iea.org

The month concluded with positive inflation news from the U.S., further increasing analyst expectations that the Federal Reserve could began cutting rates in 2024.

Here were the key events this month:

1. November 1^st 

The U.S. Federal Reserve held the federal funds rate within the range of 5.25 to 5.5%.  Although no promises of rate reductions were offered, the continuation of the rate pause caused a positive reaction in equity markets.  North America stocks rose on the news after several week of poor performance.  Fed release CNBC equities and Fed

2. November 3^rd 

The Bureau of Labor Statistics reported that nonfarm payroll had risen by 150,000 in October, and the unemployment rate rose 0.1% to 3.9%.  Each of the major worker categories saw little change in unemployment rates, as a total of 6.5 million Americans were unemployed.  BLS release 

3. November 9^th

Federal Reserve Chair, Jerome Powell, stated at an International Monetary Fund meeting that interest rates may not be high enough, yet, to bring inflation back to the 2% target, again demonstrating the sensitivity of markets to interest rate speculation. AP and Powell   

4. November 14^th 

U.S. consumer inflation was little changed in the month of October after increasing 0.4% in September.  Over the past twelve months the all-items Consumer Price Index increased 3.2%, down from September’s year-over-year inflation of 3.7%.  The rise in the price of shelter was offset by the decline in the price of gasoline. U.S. equity indexes rose 1.5 to 2.5% and the TSX jumped 1.6% for the day.  BLS release  CNBC and CPI  More CNBC and CPI 

5. November 15^th 

Producer prices fell 0.5% in October, after rising 0.4% in September.  This is the largest, monthly price reduction for the Producer Price Index since April 2020, when it fell 1.2%.  BLS PPI release

After the U.S. House of Representatives passed another spending bill the day before, the Senate voted 87-11 to end the third and latest fiscal standoff ahead of a deadline.  CNN and US Govt 

6. November 30^th 

On the 30^th, the Bureau of Economic Analysis released its Personal Consumption and Expenditures (PCE) price index.  The PCE is the Federal Reserve’s primary inflation indicator, in part because it accounts for changes in behaviours like choosing lower priced alternatives (e.g., generic versus name brands).  For the most recent period, October, the PCE rose 0.1%, and 3% from a year ago, matching analyst expectations.   CNBC and PCE  BEA PCE release  NYTimes and PCE 

What’s ahead for December?

The Bank of Canada released its interest rate decision on December 6^th, holding its policy rate at 5% and choosing to continue with quantitative tightening, stating that it is seeing signs of economic weakening, decreasing inflation and labour market easing. The next interest rate announcement from the Federal Reserve is scheduled for December 13^th.  Bank of Canada

The muted PCE measured inflation news from the Bureau of Economic Analysis provides conviction that rate cuts are increasing likely next year, which has been reflected in the markets. The extent of the economic slowdown that will accompany this, however, is still up for debate. 

Markets are currently reflecting the view of a soft-landing scenario. As economies have shown astounding resiliency because consumer spending, especially in the US. However, we are now amid the most restrictive monetary policy since the 1980s. Savings is quickly being exhausted, and more household income will need to be spent on debt repayment as mortgage and loan rates renew to the current, higher market rates. The tightening of lending conditions will also cause a slow down in business investment, which we haven’t seen the full effect of yet. Blackrock

While during November the unemployment rate was little changed, we are seeing loosening dynamics as voluntary quits fell and companies reduced hiring. Labour market loosening has been a focus for Central Banks, which will make avoiding a recession tricky, as a rising unemployment rate has long been a recession indicator.   Marketwatch  Sahm Rule

Central Banks will need to time the easing of policy at just right time to provide a soft landing, a tough expectation. Especially since they underestimated the inflationary pressures created during the pandemic and are set on not being taken off guard again. There is a large risk they will keep rates too high for too long. This leads us to continue our view of overweighting fixed income and keeping our equity holdings tilted towards quality and defensive names. 

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