Monthly Market Commentary - November 2024

Market Update
Major asset class returns were broadly negative in October after a late pullback.

While many investors believed the September rate cut would support a further rally in stocks and bonds, asset class returns were mostly lower in October. Leading up to the Federal Reserve’s (Fed’s) -0.50% cut, treasury yields had declined for five consecutive months. However, despite the Fed’s action, long-term interest rates increased in October and served as a headwind to risk assets. Against this backdrop:

• Large cap stocks continued to outperform small cap stocks: Large caps (S&P 500 Index) returned -0.9% and outperformed small caps (Russell 2000 Index), which lost -1.4%. Growth stocks outperformed value stocks, and financials represented the strongest sector.

• Bonds broke a five-month win streak as Treasury yields rose: Bonds (Bloomberg US Aggregate Bond Index) returned -2.5% as long-term interest rates moved higher. The 10-year U.S. Treasury yield increased from 3.81% to 4.28% (+0.47%) in October.

• Foreign stocks underperformed domestic stocks: Emerging Market equities (MSCI EM Index) declined -4.5% and outperformed non-U.S. developed market stocks (MSCI EAFE Index) which lost -5.4%. French stocks (-6.4%) led developed markets lower as France’s credit outlook was revised to “negative” from “stable” by Moody’s Ratings due to growing concerns around the budget deficit¹.

U.S. Equities
The S&P 500 hit a series of all-time highs in October but ended the month lower on mixed earnings results.

The rally in stocks continued through mid-October but rising bond yields and mixed earnings results led to a modest pullback at month end. As the S&P 500 is near record highs, valuations have expanded.  

• Equity valuations remain elevated: The price-to-earnings ratio (P/E ratio) for the S&P 500 Index has expanded from 19.5 at the start of the bull market (October 2022), to 27.5 at the end of September². The currently higher valuations are not by themselves a reason to avoid stocks, but they should be considered when assessing portfolio risk.

• Third quarter profits for S&P 500 firms have been mixed: As valuations expand, earnings (profits) growth will be especially important to support a further rally in stocks. 70% of firms within the index have reported earnings results, with 75% exceeding estimates (this is slightly below the 5-year average of 77%).

• Earnings breadth is expected to widen: The Magnificent 7 stocks (Amazon, Apple, Alphabet, Meta, Microsoft, NVIDIA, and Tesla) accounted for nearly 40% of the S&P 500 return year-to-date³. This may be justified due to their outsized earnings growth but a recent analysis from Goldman Sachs forecasts the earnings premium for these stocks to decline, potentially opening the door to new leadership within equites.

Fixed Income
A rapid rise in bond yields sent most fixed income sectors lower during the month.

The optimistic explanation for rising yields reads “the U.S. economy continued to grow, and the job market remains strong”. The negative viewpoint is “the budget deficit is growing, and monthly inflation has been worse than expected”. We can debate exactly why interest rates rose, but the results were as follows:

• Short duration bonds post positive gains: The Fed cut short-term rates in September, but longer-term yields rose as they are more responsive to economic factors. This hindered longer-term bond returns and led to a rise in mortgage rates, as home sales dropped to their slowest pace since 2010.

• High yield (HY) bonds cushioned U.S. fixed income returns: HY bonds (rated BB and below) carry higher credit (default) risk versus investment grade (IG) bonds. Due to their higher credit risk, HY bonds generally have shorter maturities, making them less sensitive to rising interest rates.

Federal Reserve
The Fed is expected to cut short-term interest rates by -0.25% during their November policy meeting.

Economic data has been better than expected since the Fed’s initial rate cut of -0.50% in September, and many investors now expect monetary easing to continue at a more gradual pace going forward.

• Fed members favor patience for future rate cuts: Several regional members of the FOMC have stated their support for “gradual rate cuts”. Raphael Bostic (Atlanta) stated “he is not in a hurry to lower interest rates” as policymakers are committed to achieving 2% inflation. Neel Kashkari (Minneapolis) reiterated a preference to “reduce rates at a slower pace in the coming quarters” and Jeffrey Schmid (Kansas City) said he “favors a slower pace of rate reductions” given the economic uncertainty⁴.

• The Fed’s survey of economic conditions showed little change: Also known as the “Beige Book”, the report of economic conditions indicated activity was little changed since early September. This suggests the economy may not be as strong as other economic data has indicated and supports the Fed view that risks to economic growth and inflation are in balance. 

• Interest rate futures markets are projecting the Fed to cut rates by -0.25% in November⁵: There is currently a 99% probability of a -0.25% rate reduction at the Fed meeting in November, with incremental reductions expected through the end of 2025.

U.S. Presidential Election
Market volatility has been higher in periods around U.S. presidential elections.

The uncertainty that we all feel around presidential elections has contributed to higher market volatility around these events. In most cases, the volatility quickly subsides and provides entry points for opportunistic investors. The following themes have persisted during election periods.

• Stocks have experienced higher volatility around presidential elections: A recent study analyzed the last 24 U.S. presidential elections. On average, equity market volatility was higher in the months immediately before and after the elections⁶.

• Stocks have delivered their best returns under a divided congress: Congress is currently divided as Democrats control the senate and Republicans control the house. Although control from a single party can lead to easier policy enactment, historical data indicates higher equity returns when congress is divided.⁷

Economic Calendar
U.S. job growth reaccelerated in October and the unemployment rate declined. 

The U.S. economy remained steady during October as job growth was strong, consumer spending was higher than forecasted, and annualized inflation (CPI) continued its recent downward trajectory.

• U.S. job growth surged in September: +223k new jobs were added during the month, which was well above analyst estimates (+140k). The unemployment rate ticked lower by -0.1% to 4.1% and has now declined for two consecutive months. October jobs data was released on November 1 and only reflected +12k new jobs (below the forecast of +100k). However, there were expectations this report could be an outlier due to the Boeing strike and recent hurricanes in the U.S.   

• Retail sales notched their third consecutive monthly increase: Sales increased +0.4% for the month and exceeded estimates (+0.3%). Consumers remained resilient as discretionary spending at restaurants and clothing retailers boosted overall sales. Gasoline prices have steadily declined from an average of $3.60 to $3.22 a gallon over the last three months and likely boosted spending power for consumers.

• Annualized inflation (CPI) declined for the sixth consecutive month: Monthly inflation increased +0.2% in September, matching the +0.2% increase in August, but annualized inflation fell to +2.4% and was slightly above expectations (+2.3%). Similar to August, higher shelter related costs were a significant driver of the monthly increase.

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