Market Comment - November

The market celebrated a stunning rally, with an extraordinary performance for the month of November. A comparable November strength has not been registered for over 70 years. Weaker-than-expected economic data, which confirms the “bad news is good news” trade, helped to propel both bonds and equities. Even more surprising, despite a slowing economy, investors started to bet on cyclical sectors like consumer discretionary and semiconductor companies. Falling inflation additionally fueled investors’ confidence. The economy, as well as earnings, are not important right now, as the main attention is on interest rates. While lower increases in prices may be a good thing, one must ask what price tag investors will pay for it.

Currently, there is the belief that falling inflation will be accompanied by continuous growth. In the current economic environment, though, the price for falling inflation should be less growth. Worth noting is that the trend in continuing jobless claims is slowly trending higher, confirming that US workers who have lost their jobs are increasingly having difficulty getting hired again.

With a loss of more than 20.00% from its November high, crude oil reminded traders why its market is called the “widow maker.” While OPEC+ tries to stabilize the price, speculators who bet on a geopolitical oil price spike got badly burned and are now weighing on the market. US oil exports continue to rise, compensating for the cuts of the cartel. Lower energy prices impacted the US consumer positively. It is surprising that despite the favorable environment, the “buy now, pay later” business practice was strong during the past months. The same applies to the US government. The US Federal Budget Balance for November showed a deficit of 314 billion US dollars, an impressive number, but still only the third-largest monthly deficit of the year. Higher interest rate costs, for now, seem to have little impact on the spending behavior in the United States.

Another surprise was the strength in European equities, measured by the STOXX 600 Index. On a currency-adjusted basis, it performed 0.46% better than the S&P 500. Strong moves in equity markets always lead to pressure on portfolio managers, especially as the year comes to an end. As the exuberant mood continued into December, one must ask if 2022 was just a minor correction in the longest bull market we have ever seen, or if the market is delivering another bad surprise in 2024.

The current short-term setup for equities remains bullish, although very extended. The Presidential Year Seasonality is showing a rollercoaster market with a negative bias until the month of May. While it is clear that investors currently fear missing out on future gains, from current levels, the risk-reward for both long-duration bonds and equities is poor.