November 2023 Stonemark Market Commentary

Did Christmas Come Early?

As Americans gathered around the Thanksgiving table this past month and recited what they were thankful for, market performance may have made the list, as the U.S. stock market defied skepticism and surged to its best performance in almost a year and a half, marking one of the most robust Novembers in decades. Fueled by the belief that the Federal Reserve has concluded its rate hikes, investors found themselves giving thanks for this unexpected rally amid challenges like a regional banking crisis and geopolitical tensions. Noteworthy gains were seen across indices, with the Nasdaq rising by 10.70%, the S&P 500 by 8.92%, and the Dow Jones Industrial Average by 8.77%.

The standout performers, the "Magnificent 7," which includes Apple, Microsoft, Google, Amazon, Facebook, Nvidia, and Tesla, have collectively surged over 70% this year, accounting for a substantial portion of S&P 500 returns, highlighting the growing influence of Artificial Intelligence in investment decisions. Amidst this gratitude for market resilience, Federal Reserve Chair Jerome Powell's cautionary remarks about potential inflation head fakes remind us to tread carefully. Despite a recent cooling in inflation, Powell warns against misinterpretation, emphasizing the central bank's vigilance. As we navigate this landscape, a closer examination of November's key economic data becomes imperative to discern the forces influencing market dynamics.

Economic Data

Market sentiment received a notable boost with the release of the October Consumer Price Index (CPI) reading, surpassing expectations with a milder trajectory. Both headline and core inflation retreated to 3.2% and 4.0% year-on-year, respectively. The significant decline was chiefly attributed to reduced energy and gasoline prices, accompanied by decreased travel expenses and hotel rates. This downward trend sparked optimism, fostering the belief that inflation might reach the 2% mark by the close of 2024. In response, stocks and government bonds soared as investors interpreted this development as a signal that the Federal Reserve had concluded its rate-hiking cycle. However, while market consensus leans towards peak policy rates having been reached, the November Federal Open Market Committee minutes clarified that the Fed is resolute in maintaining policy rates at elevated levels for an extended duration.

While economic data demonstrated resilience, there are discernible signs that the U.S. economy is experiencing a cooling phase. In October, nonfarm payrolls expanded by 150,000, falling short of the 179,000 consensus estimate. Adjustments to job gains in August and September further underscored this trend, with a downward revision of 101,000. The unemployment rate, which stood at 3.8% in September, edged higher to 3.9% in October, a contrast to the sub-3.5% levels seen in the summer. Average hourly earnings, growing at 4.1% year-over-year, exhibited a slight deceleration from the 4.3% growth in September and approached the 5% mark observed a year ago.

Additionally, November's survey of U.S. consumer sentiment by the University of Michigan portrayed a sustained decline for the fourth consecutive month. Furthermore, households' inflation expectations escalated, reaching the highest level in over 12 years for medium-term price pressures. The preliminary reading of the Consumer Sentiment Index dropped to 60.4, its lowest since May, compared to October's final reading of 63.8, defying expectations for a marginal change at 63.7. Notably, consumers' inflation outlook for the year ahead reached a seven-month high at 4.4%, and over a five-year horizon, the expectation rose to 3.2%, the highest since March 2011.

These sentiments manifested in retail sales figures for October, revealing a reduction in consumer spending on vehicles, fuel, and other retail stores. The Commerce Department reported a 0.1% decline in U.S. retail sales from the previous month, following a 0.9% increase in September. Coupled with the slowdown in hiring and a nuanced inflation landscape, these retail sales figures suggest a deceleration in the economy as it approaches the holiday shopping season.

Economic Forecasts

Shifting our focus to the near-term trajectory of the economy, the Conference Board's release of the Leading Economic Indicators (LEI) report provides valuable insights. Combining 10 forward-looking economic indicators, the report indicates sustained contraction, with the composite LEI falling by 0.8 percent in October 2023 to a level of 103.9 (2016=100). This decline follows a 0.7 percent drop in September. Over the six-month period between April and October 2023, the LEI contracted by 3.3 percent, a moderated decrease compared to the 4.5 percent contraction observed in the preceding six months (October 2022 to April 2023).

Key contributors to the recent decline in the LEI include deteriorating consumer expectations for business conditions, a lower ISM® Index of New Orders, declining equities, and tightened credit conditions. Following a brief pause in September, the LEI has resumed signaling a potential recession in the near term. The Conference Board anticipates various factors, such as heightened inflation, elevated interest rates, and reduced consumer spending driven by the depletion of pandemic savings and mandatory student loan repayments, could collectively push the U.S. economy into a brief recession. Their forecast projects a modest 0.8 percent expansion in real GDP for 2024.

The conjunction of decelerating job growth and inflation reports surpassing expectations has all but eradicated the likelihood of the Federal Reserve implementing interest rate hikes during its upcoming December FOMC meeting. According to the CBOE FedWatch tool, not a single respondent anticipates a rate hike in December, and less than 1% anticipate a rate cut. The outlook for early 2024 is similarly muted, with approximately 28% of bond traders speculating a 25-basis points rate cut in March, while a substantial 72% anticipate the Fed maintaining its current stance.


Looking into the future, the investment landscape holds promise. Artificial Intelligence (A.I.) remains a compelling long-term investment, as the swiftly evolving industry suggests opportunities extending beyond the dominant “Magnificent 7” stocks. For investors cautious of potentially overextended markets, numerous stocks have yet to experience comparable valuation increases, with the remaining S&P 500 showing a modest 3.5% year-to-date uptick. In essence, the market continues to unveil opportunities for investors, whether seeking to embrace risk through growth or adopting a defensive stance with value investments. Embracing active management appears prudent, offering investors a strategic approach to navigate potential surprises in the upcoming year.