November 2023 | Equity Commentary
Published on December 20, 2023
The S&P 500 delivered its strongest month in three years, rising +9.1% in November.1 We think both fundamental and technical factors drove the rally. Fundamentally, the probability of a soft economic landing increased, implying that the U.S. may avoid recession and that the Federal Reserve will likely stop raising interest rates in this cycle. Better-than-expected inflation prints in October added to investors’ conviction that the Fed is ‘done,’ while falling interest rates, crude oil and gasoline prices, and mortgage rates bolstered the short-term outlook for U.S. consumers and businesses. Perhaps the most substantial tailwind for equities in November was falling interest rates, with the yield on the 10-year U.S. Treasury bond declining from 4.93% at the end of October to 4.33% by November’s end.2 From a technical standpoint, we mentioned last month that the November – January timeframe tends to be a strong seasonal period for stocks, and it’s also worth noting that stocks historically perform well in the third year of a presidential term. Finally, a key technical indicator, the Relative Strength Index (RSI), fell below 30 following the July 31 – October 27 correction of -9.9%. When the RSI falls below 30, it may indicate that the stock market is oversold.3
October inflation data was better than many market participants expected. The Labor Department reported that core CPI was flat from September to October and rose 3.2% year-over-year. Importantly, core inflation from June to October rose at a 2.8% annual rate, a significant improvement from the 5.1% pace in the first five months of 2023.4 The Federal Reserve’s preferred inflation gauge, the personal consumption expenditures (PCE) price index, rose 3% year-over-year in October, a meaningful decline from the previous month and below the long-term average for inflation (3.3%). Core PCE prices rose at a 2.5% six-month annualized rate, a significant step down from the 4.5% rate for the six months through April.5
As we expected, the Federal Reserve held rates steady at the Federal Open Market Committee’s November 1 meeting. With long-duration interest rates pressured higher and the Fed no longer convinced that higher unemployment and weak economic growth are needed to lower inflation, it seems likely that they are done raising rates in this cycle. Indeed, in comments following the meeting, the Fed emphasized the risks to growth versus the risks to higher inflation, which seemed to confirm their view that monetary policy is sufficiently tight.
While inflation trends lower and the Federal Reserve winds down its monetary tightening campaign, the U.S. economy continues to grow. The Bureau of Economic Analysis (BEA) revised its third-quarter GDP growth estimate to 5.2%, up from the 4.9% “advance” estimate. The BEA said the upward revision primarily reflected higher business investment and government spending, partly offset by a downward revision to consumer spending.6 October saw U.S. consumers pull back slightly, with the Commerce Department reporting that consumer spending rose 0.2% in October—a marked slowdown from September’s 0.7% month-over-month increase. October’s pace of increased spending was the slowest since May, as data indicates Americans bought less furniture, clothes, and vehicles. The relatively weak month may have also just been influenced by consumers waiting for better deals to arrive in November. Anecdotally but still importantly, consumers spent $38 billion in the five-day Thanksgiving period through ‘Cyber Monday,’ up 7.8% from 2022 levels.7
It seems that Americans are still wary of their economic prospects and the overall state of the economy, as the University of Michigan sentiment index has fallen every month since July. Inflation has made its mark on consumer sentiment, and high mortgage rates and lack of housing affordability are certainly playing a key role. Fundamentally, however, American households generally seem to be in solid shape. Household net worth hit a new record in the second quarter, and with prices of existing homes, stocks, and bonds all higher over the past few months, it appears likely that consumer net worth set another record in Q3.
One final tailwind for stocks and the economy in November, in our view, was falling crude oil and gas prices. Crude oil prices fell by about 5% for the month,8 while the retail price of gasoline has fallen by over -15% in the last ten weeks.9 There are arguably a few factors driving oil lower. The conflict between Israel and Hamas did not grow wider as once feared, and instead featured a ceasefire in November where hostages and prisoners were exchanged. In November, OPEC+ called for cuts of an additional million barrels a day, but the cuts are voluntary. Traders do not seem convinced that major oil-producing nations like the United Arab Emirates, Nigeria, and Angola will necessarily sign on, and the counterweight of strong production from the United States is also likely neutralizing the impact from any OPEC moves. The U.S. Energy Information Administration reported that U.S. crude and condensate production increased to 13.24 million barrels a day (b/d) in September, with increases of 342,000 b/d over the previous three months (annualized growth of 11%).10 Record output from the U.S., coupled with the expectation of falling global demand given China weakness and the impact of higher interest rates, has arguably kept prices anchored.
1.Bloomberg: SPX Index TRA
2.Bloomberg: USGG10YR Index
3.Relative Strength Index (RSI) _ Fidelity.pdf
4.Consumer Price Index Summary – 2023 M10 Results.pdf
5.Personal Income and Outlays, October 2023 _ U.S. Bureau of Economic Analysis (BEA).pdf
6.Gross Domestic Product (Second Estimate) Corporate Profits (Preliminary Estimate) Third Quarter 2023 _ U.S. Bureau of Economic Analysis (BEA).pdf
7.Consumers Pulled Back on Spending, Inflation Eased in October – WSJ.pdf
8.Bloomberg CL1COMB Comdty Index
9.Bloomberg 3AGSREG Index
10.Record U.S. oil output challenges Saudi mastery_ Kemp, Energy News, ET EnergyWorld.pdf
As of November 30, 2023