U.S. and International Equities
Markets ended the week higher as we start December. The Dow Jones Industrial ended November with an 8.9% gain, rebounding from its three-month losing streak. The S&P 500 Index also increased 8.9% in November as the Nasdaq Composite returned 10.7%. Both indexes had their best monthly returns since July 2022, and are trading 1% away from their respective 2023 high. European equity markets also recorded a strong November as Eurozone inflation is showing signs of easing.
Last quarter earnings were generally seen as positive; however the major market driver was the belief that the Federal Reserve (Fed) is finished increasing interest rates. In addition, many investors believe that the U.S. economy may witness a soft-landing.
Sentiment continues to be bullish according to the most recent AAII Survey. The percentage of bullish investors increased slightly to 48.8%, well-above the historical long-term average of 37.5%. Bearish investors declined to 19.6%, below the historical average of 31.0%.
Fixed Income Higher
The Bloomberg Aggregate Bond Index continued higher this week amid momentum from peak Federal Reserve hawkish monetary policy being reached and economic soft-landing narratives. In addition, high yield bonds gained ground this week.
The last few years have been challenging for fixed income investors, with 2022 going down as the worst year on record for the Bloomberg Aggregate Bond Index. And while 2023 was supposed to be the year for bonds, fixed income returns for most core bond categories have only recently turned positive for the year. We believe that the Federal Reserve will pause on rate hikes, which should aid fixed income moving forward.
Oil prices finished negative as The Organization of Petroleum Exporting Countries and its allies (OPEC+) agreed to output cuts approaching 2 million barrels per day (bpd) for early next year, which includes Saudi Arabia’s voluntary supply reduction. Natural gas has been pressured by milder-than-expected weather as production reached a record high. Gold and silver witnessed a second straight month of gains as the peak Fed narrative gains traction.
Economic Weekly Roundup
October New Home Sales
After a very volatile 2022, the pace of new home sales has stabilized around the pre-pandemic rate. This is good news for homebuilders prepping for 2024. Median prices for new homes are down roughly 17% from last year as inflation pressures moderate amid higher borrowing costs. Amid extremely low inventory of existing homes on the market, new home sales will likely remain robust to meet the demand. As mortgage rates fall and the Fed pivots away from hiking rates, homebuilders should expect continued growth in business activity.
Q3 GDP Revisions
The revised estimate for Q3 GDP brought about surprises. Consumer spending was revised down but greater upward revisions to government and business spending pushed headline growth to 5.2% annualized from 4.9%. Consumer spending was revised down to 3.6% annualized from 4.0% but government spending was revised up.
November Beige Book
The November Beige Book reported that despite the tightness of the labor market and the shortage of skilled workers, several districts reported flat to only modest increases to payrolls. Several areas of the country reported declines in starting wages for unskilled workers, a sign that we have likely seen a shift in overall labor demand.
However, businesses are still paying a premium to attract and retain talent. Construction costs are starting to decline, a leading indicator of continued cooling in pricing pressures. Banks saw a slight uptick in consumer delinquencies, a theme corroborated by other public reports.
The anecdotal evidence suggests the Fed is getting what it wished for: an economy experiencing a painless, measured slowdown.
October Personal Consumption
Headline inflation in October was unchanged month over month, pulling the annual rate down to 3.0% from 3.4% in September. The economy is in a period of flux as we see illustrated in the inflation data. Prices for goods decreased 0.3% from a month ago as prices for services increased 0.2% over the month. Goods prices likely declined as consumer demand waned, especially for durable goods.
Consumer demand was strong in international travel, food services, and accommodations. If consumers return to normal spending patterns, we should see a modest deceleration in the rate of spending as consumers recalibrate. The 3-month annualized rate of core inflation does not signal any potential resurgence in inflation.
Weekly Employment Report
Initial and continuing claims came in above the prior week as well as analyst expectations. We believe the labor market is expected to further loosen over the coming months as companies respond to slowing demand, partly driven by the Fed’s tighter monetary policy.
The following economic data is slated for the week ahead:
Monday: Durable orders (Oct), factory orders (Oct)
Tuesday: BEA Total Light Vehicle Sales (Nov), PMI Composite (Nov), S&P Global PMI Services (Nov), ISM Services (Nov), JOLTS Job Openings (Oct)
Wednesday: ADP Employment Survey (Nov), unit labor costs (Q3), productivity (Q3), trade balance (Oct)
Thursday: Weekly initial and continuing unemployment claims, wholesale inventories (Oct), consumer credit (Oct)
Friday: Hourly earnings (Nov), average workweek (Nov), manufacturing payrolls (Nov), nonfarm payrolls (Nov), unemployment rate (Nov), Michigan sentiment (Dec)
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Investing involves risk including the loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Bond yields are subject to change. Certain call or special redemption features may exist with could impact yield. High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
The fast price swings in commodities will result in significant volatility in an investor’s holdings. Commodities include increased risks, such as political, economic, and currency instability, and may not be suitable for all investors.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets. Municipal bonds are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply. If sold prior to maturity, capital gains tax could apply.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.
For Public Use Tracking 511980
Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations |Not Bank/Credit Union Guaranteed | May Lose Value
For a complete list of descriptions of the indexes and economic terms referenced in this publication, please visit our website at lplresearch.com/definitions