Market Commentary: November 2019

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Investment Strategy Team
December 16, 2019
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Looking Back: November Highlights

With the market climbing to all-time highs in October, our last commentary focused on whether we were entering the nascent stages of a S&P 500 breakout following roughly two years of consolidation. November marked another strong month for global stocks, with the MSCI All Country World Index (ACWI) returning 2.5%, the S&P 500 Index returning 3.6%, and the MSCI EAFE Index (i.e., developed Europe and Asia) returning 1.1%. While consecutive months of strength from international equities in September and October had some investors claiming a change in trend was beginning to form, we believe investors would do well to keep the longer-term trend in mind.

Total Return Ratio to S&P 500, Trailing 5 Year

Source: FactSet

The Bloomberg Barclays U.S. Aggregate Bond Index fell 0.1% in November, as yields crept up across the term structure. There was no significant change in the 10s/2s slope, but the middle portion of the curve steepened amid prospects of easier monetary policy. The yield curve has now almost entirely, and very quietly, uninverted, as the market begins to acknowledge the correction of the “error” made by the Federal Reserve in December 2018 and the completion of its “mid-cycle adjustment.”

U.S. Treasury Yield Curve

Source: FactSet

Other November Occurrences

  • Price action suggests economic growth rates may have troughed in the third quarter:
  • After nearing zero toward mid-November, the Federal Reserve Bank of Atlanta’s GDPNow real GDP growth estimate for the fourth quarter of 2019 rebounded strongly to finish the month near 2.0%.[1] The GDPNow estimate uses various economic data points, as they become available, to project likely GDP growth for the quarter well ahead of the release of official numbers.
  • The IHS Markit Eurozone Manufacturing Purchasing Managers’ Index (PMI) came in at 46.9 in November, marking the tenth straight month of activity contraction (readings below 50 are indicative of contraction). However, the reading was higher than in the prior two months. Germany, a bellwether for the health of the European economy, registered a PMI reading of 44, its highest since June, suggesting September’s 41.7 reading may have marked a low.
  • Nominal retail sales growth, while positive, is slowing. However, Black Friday sales were strong, with the average shopper spending 16% more over the five days from Thanksgiving Day through Cyber Monday. Although the Conference Board Consumer Confidence Index slipped to 125.5 in November, the reading remains elevated.

What We’re Watching

  • We continue to monitor developments on the trade front, particularly those which may have outsized implications for business spending as uncertainty could weigh on capital expenditures. Most indications point to the U.S. not implementing the December 15 tranche of tariffs (although given President Trump’s history of throwing late-inning curveballs in the process, we by no means accept this as a given), and talks are now focused on reducing or rolling back some of the roughly ~$360B in tariffs imposed on Chinese goods over the past 18 months.
  • Following October’s 25 basis point rate cut to a new target range of 1.50-1.75%, along with December’s decision to keep rates unchanged, Fed Fund futures are pricing in a ~90% chance of no move for January’s Federal Open Market Committee (FOMC) meeting. We will watch how rate-sensitive sectors (e.g., REITs and utilities) respond to a potential rate increase. A selloff could mean a more durable rise in rates—driven by some combination of rising real GDP growth and expected inflation—is imminent.
  • Widening of high yield spreads typically portends equity market trouble. The recent rise in Caa (CCC) spreads has been largely confined to the energy sector, but high yield spreads are nevertheless back to levels last seen in December 2018. However, option-adjusted spreads higher up the credit spectrum remain contained.
Option-Adjusted Spreads to Treasuries

Source: FactSet

What’s in Store for Capital Markets?

  • November through April is historically the best six-month performance period for stocks. Over the past twenty years, the S&P 500 has averaged 5.5% from 11/1 to 4/30, versus 1.5% from 5/1 to 12/31.
  • We continue to believe the market is climbing a “wall of worry.” While subdued put/call ratios imply a lack of investor angst, fund flow data suggests anything but a rush into equities. Furthermore, IPO issuance as a percentage of overall market valuation is low, and blockbuster names such as Uber, Slack, and Peloton have struggled since their public listings, belying typical market top behavior.
  • As the 2020 presidential race hits full stride, we will take this opportunity to point out that markets perform well during election years—at least historically.

[1] This preceded the strong U.S. Bureau of Labor Statistics (BLS) employment data made public on Friday, December 6.

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