Authored by :
Michael G. Dow, CAIA, CFA, CPA, Chief Investment Officer
Julien R. Frazzo, Director of Risk Management and Securities Research
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The Quick Facts
- The S&P 500 posted its second consecutive month of gains, with a total return of 5.6%
- Federal Reserve (Fed) Chair Jerome Powell hints that the central bank will slow the pace of its aggressive rate-hiking campaign
- The yield on the benchmark U.S. 10-year Treasury now sits at 3.61%, 65-basis points (bps) below the October peak of 4.24%
- Inflation remains hot, with CPI at 7.7%, but less than feared. Next CPI prints on December 13
A rally on the last trading day of November capped off a month of relief for the market in the form of easing inflation and optimism surrounding a potential slowing pace of U.S. rate hikes. The S&P 500 posted its second consecutive month of gains, with a total return of 5.6%. The Dow and the Nasdaq Composite ended the month up roughly 5.4% and 4.5%, respectively. The S&P 500 is now down “only” 13.1% YTD, about half the 25.4% max drawdown recorded in 2022.
On the last day of November, Fed Chair Jerome Powell spoke at the Brookings Institution, signaling a slowdown in the pace of tightening of interest rates could happen as early as the next meeting on December 14. Powell added that more rate hikes would be needed to tame inflation and said that the ultimate terminal rate may be higher than previously thought. The Fed has raised the target range for the federal funds rate six consecutive times, the last four being three-quarter point increases, pushing borrowing costs to their highest levels since 2008. Fed fund futures are now pricing an 82% chance of a 50-bps rate hike at the December 14 Federal Open Market Committee (FOMC) meeting.
Geopolitics continues to impact the markets. The risk of a global recession, China’s “zero COVID” policy, and the war in Ukraine are top of the list. Markets reacted favorably to China loosening its “zero COVID” policy restrictions. When China’s “zero COVID” starts to soften, it should help reduce global inflation as supply chain issues start to ease. Chinese President Xi Jinping’s government has promised to reduce the disruption of its zero-COVID strategy by shortening quarantines and making other changes.
November Asset Class Performance
Midterm elections have mostly concluded with Republicans winning enough seats in the House of Representatives to constitute a majority. The Democrats will retain control of the Senate regardless of the outcome of the Georgia runoff. A divided congress following a midterm election has historically been good for markets. A split government makes it harder for policy changes to take place, offering more visibility to investors.
Earnings season has nearly concluded, and corporate profits for the S&P 500 grew modestly in 3Q 2022. Excluding the energy sector from the earnings growth would result in a decline in earnings for the quarter. The 2023 EPS estimate saw a significant decline during the quarter and has currently settled just below $229, with the growth rate for next year declining to 3.1%.
On a total return basis, all 11 sectors finished the month higher, with Materials in the lead with a +11.7% return. Energy, Consumer Discretionary, and Health Care were the laggards, posting a positive return of 1.3%, 1.5% and 4.7%, respectively. The Russell 1000 Value was up 6.2% in November, outperforming the Russell 1000 Growth by 1.7% in November and 19.6% YTD. The outperformance of Value over Growth continues to be a major investment theme in an environment where long-dated cashflows are discounted at higher rates. The ESG segment of the market, as measured by the MSCI USA ESG Select Index, was up 6.4% in November, 0.8% more than the S&P 500. Over the last three years, the ESG index is up 41.16% and approximately 4.7% ahead of the S&P 500 on a total return basis.
October’s headline CPI released on November 10 increased less than expected, helping drive the peak inflation theme and possibly compel the Fed to be less aggressive with future rate hikes. Total CPI increased 0.4% M/M vs. consensus +0.5% and is up 7.7% Y/Y, a decline of 0.5% from September and below consensus of +7.9% for the month. Food costs increased again, but less than expected (+0.6% M/M and is now up 10.9% Y/Y). This was the smallest monthly increase in the food index since last December. Energy increased 1.8% after declining 2.1% in September and is now up 17.6% Y/Y. Shelter, a major component of CPI, increased again at +0.8% M/M and +6.9% Y/Y. Less food and energy, core CPI increased 0.3% M/M and +6.3% Y/Y, both below consensus.
The yield on the benchmark U.S. 10-year Treasury was at 3.61% at the end of November, below the October peak of 4.24%. The 30-year yield moved back below 4% mid-month to 3.74% at the end of the month. Yield on the shorter-term 2-year recently touched 4.72% (ahead of the September CPI print and the highest level we have seen since 2007) but pulled back at month’s end to settle at 4.31%. The falling yields helped equities rally in November. The yield curve remains inverted, with 2-year Treasuries yielding more than 10-year maturities.
Oil prices, as measured by the WTI Crude Oil $/bbl., declined 6.9% in November. WTI traded as high as $123.70/bbl. in March, a 14-year high. Oil remains up 7.1% YTD at $81/bbl. but is off ~ 35% since its March high. Gold spot prices rose 8.3% in November. Since the March high of $2050, gold is down 13.7%. For 2022, gold remains down 3.3%. The U.S. Dollar Index saw a large reversal with a 5.0% decline in November. The index has gained 10.7% YTD. Cryptocurrencies were hammered in November. The bankruptcy of FTX sent ripples throughout the space on solvency and government oversight concerns. Bitcoin declined up to 27% in November, making a new 52-week low of $15,485 before rallying back late in the month to finish down 16.2%. Bitcoin and Ethereum are down 63.1% and 64.8% YTD, respectively.
Volatility in equity markets softened into the month-end following the mid-month CPI release and Jerome Powell’s speech at the Brookings Institution. The CBOE Volatility Index (or VIX), also known as the fear gauge, sank nearly 20% in November from a high of 26.5 to start the month, getting as low as 20.4 before ending at 20.6. While equity investors look to the VIX index as a measure of volatility, bond investors focus on the ICE BofA MOVE (MOVE) Index, which measures bond market volatility. The MOVE Index has more than doubled this year, but it closed the month at ~120, 25% off the 161 high recorded in October.
Chart of the Month – Housing Market Metrics: Mortgage Activity, Rates, Affordability
The U.S. housing market is tightly linked to interest rate increases. The housing market – and the equity market – are in the Fed’s crosshairs. Housing and stocks need to cool off for the economy to slow – and for inflation expectations to moderate.
According to data from mortgage finance agency Freddie Mac, the 30-year fixed mortgage rate breached 7% in October for the first time since 2002. Between increasing interest rates and a decreasing number of home sales, both buyers and sellers must adjust their expectations to participate in a cooling market.
The Housing Affordability Index measures whether a typical family earns enough income to qualify for a mortgage loan on a typical home at the national and regional levels based on the most recent price and income data. As of September 2022, the national index was below 100, which means that the typical family can no longer afford to buy the median-priced home. An index below 100 means that a family with a median income had less than the income required to afford a median-priced home. The income necessary to afford a mortgage, or the qualifying income, is the income needed so that mortgage payments on a 30-year fixed mortgage loan with a 20% down payment account for 25% of family income.
Quote of the Month
“In investing, what is comfortable is rarely profitable”
– Robert Arnott
Major Asset Class Dashboard
Important Disclosure: This report is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal or tax advice. All investments involve risks, including the loss of principal. Investors should consult with their financial professional before making any investment decisions. Past performance is not a guarantee of future results.
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