Monthly Comment - November 2023

This month of November emerged at a critical juncture, marked by a mix ofeconomic optimism and caution. Although higher interest rates lingered, animpressive 5.2% year-on-year rise in 3Q GDP – the fastest in nearly two years –juxtaposed these concerns. Market sentiments shifted favorably across variousasset classes, including Treasurys, corporate credit, emerging markets, andequities. This broad-based rally, driven by speculations about the FederalReserve's (Fed) potential policy shift next year, led to November being aremarkable period in financial market history.However, expectations for the continuation of these gains are tempered. Thepositive outlook for 2024 includes projections for equity and fixed income marketsto climb, underpinned by factors like subsiding inflation, anticipated Fed rate cuts,and a predicted economic rebound in the latter half of the year.1. Fed’s Tightening Cycle Ends: The financial market in 2023 was largelyoccupied with predicting a Fed pivot, often with inaccurate outcomes. But, byNovember, the combination of rising interest rates, easing inflation, and stabilizingwages led to a consensus that the Fed's tightening phase had concluded.Although the Fed maintains a cautious stance, ready to hike rates if needed,recent statements from Fed officials, notably Governor Waller, suggest that apolicy shift might be imminent. Market expectations are now set on rate reductionspotentially starting as early as March 2024.2. Surge in Bond Rally: The 10-year Treasury yield, after surpassing 5.0%, saw asignificant drop of over 75 basis points, reaching an intra-day low of 4.25%. Thisshift, fueled by optimism about central banks concluding their tightening cycles,propelled the Bloomberg US Aggregate Bond Index to its highest monthly gain indecades. Investment grade corporate and municipal bonds also reportedsubstantial returns.3. Equity Market Performance: Historically, November has been a strong monthfor equities, and this year was no exception. The S&P 500 recorded a 9.1%increase, its best monthly outcome since July 2022. This surge was supported byrobust economic data, a decline in interest rates, and growing expectations of Fedrate cuts. Sectors like Info Tech, Consumer Discretionary, Real Estate, andFinancials led the rally.4. Positive Correlations: Unlike 2022, when negative correlations led tosignificant portfolio losses, the strong gains in November resulted in one of thebest monthly performances for the 60/40 portfolio in decades. Positive correlationsbetween equities and bonds are expected to enhance portfolio performance in2024.5. Consumer Relief at Gas Pumps: Despite weakening consumer dynamics, onenotable relief came from declining gas prices, marking the longest streak of pricedrops since November 2022. This decrease in gas prices is projected tosignificantly boost consumer spending power, offering some respite amidst variouseconomic challenges.In summary, November 2023 marked a turning point in the financial markets,characterized by a mix of optimism, strategic shifts in monetary policy, and varyingsector performances. While the future pace of these gains remains uncertain, theoverall market sentiment leans towards cautious optimism, with anticipation forcontinued growth in both equity and fixed income markets.