Monitoring market activity across the month did not come without its ups and downs. The move up early in the month has been sustainable thus far… Should that continue?
Fixed Income: 2-Yr Treas Yield 4.13% | 10-Yr Treas. Yield 4.18%
Rates across the month drifted lower. As evidenced by the blue line and the green line below. Immediately following the first Tuesday of November, rate markets were up (red line). This didn’t last long as the equity market rally poured over into fixed income (ever so slightly).
Interestingly, the expectations for a Federal Reserve Board Rate cut have fallen from a near certainty to a 64% chance (CME FedWatch). Typically, the level of confidence needs to be more than 70% for it to indicate predictability. Should consumer spending prove weak (doubtful) and energy prices continue to ease (likely) then we could see that likelihood breach the 70% mark, leading to another rate cut.
Equities: Dow Jones 7.54% | S&P 500 5.73% | NASDAQ 6.21%
Equity markets did not drift as we saw with fixed income. The first Tuesday of November (predictably) brought a rally for markets. Much of the growth listed above was achieved in that one week of the month. Typically, a move this drastic would be followed by an expanded P/E ratio, which was not the case this time. The rise in prices moved in line with an earnings season that has proved out the price. From a long-term standard, the P/E is still overpriced, but no worse than at the end of October. The single best performing sector of the month was Consumer Discretionary followed closely by Financials. The worst performing sectors were Healthcare and Materials.
Consumer Discretionary outpacing in November is not surprising given consumer spending during the holiday season. Financials outperforming is a result of higher-than-expected interest rates improving margins for Financial companies, as well as Q3 outperformance. Healthcare as a defensive stock did not fair well during the bull rally of November. Materials were negatively impacted by lower housing starts and the potential of inflation in the commodity markets.
Conclusion
The first Tuesday of November every few years brings us predictability and this November was no different. The increase in yields leading into November was very telling of the potential impact of future tariffs. A tariff environment should signal firmer inflation. Which, in turn, would result in interest rates remaining higher than originally thought. The turnaround in rates in November did not signal a reversal of that belief. It was merely that rates remain restrictive at this point. So, they are still likely to fall moving forward, just not as sharply as previously thought.
A Look Ahead…
December typically carries a positive tone as we wind down earnings season and the focus shifts to consumer spending. This is often affectionately referred to as the Santa Claus rally. A phenomenon that typically occurs between Christmas and New Years and can carry some fairly good growth with it. It often feels like a melt up effect. No massive data to support the uptrend, but yet the trend persists. As we get into the new year, some reversal of that trend can be expected. Volatility may tick up as the path on tariffs becomes clearer.
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