Key Points:
• Volatility came back into the financial markets as a host of uncertainties worried investors.
• Stocks were mixed for the month with the S&P500 and Dow Jones Industrial Average posting modest gains.
• Bonds and international stocks continue to have a strong year, rewarding globally diversified and balanced investors.
Markets were mixed in November with the government shutdown, disagreement among Fed officials and elevated stock valuations causing investor anxiety. The S&P500 and Dow Jones Industrial Average posted modest gains while the NASDAQ fell 1.5% amid a selloff in technology stocks (-4.3%). Value stocks dramatically outperformed growth stocks for the month with healthcare (+9.3%), communication services (+6.4%) and materials (+4.2%) attracting investor interest. Concerns surfaced around an artificial intelligence bubble and if there is an overbuild of AI systems. Years ago, we used Alta Vista, Yahoo! and Ask Jeeves in web searches. Today, Google has been the main survivor and accounts for 90% of all search queries (Source: Google AI).
All eyes will be on the Federal Reserve’s December decision to keep rates flat or cut another 25 basis points (0.25%) in an effort to ease financial conditions. Fed Governors seem to be split as to the best course of action to balance the economy. Proponents of an interest rate cut cite the slowing labor market, stalled housing market and weaker consumer confidence. Those in favor of keeping rates flat are centered on elevated inflation. Decreases in the Fed Funds Rate cut both ways: they help borrowers by offering cheaper financing but hurt savers who generally receive lower yields in interest bearing assets (CDs, money markets etc.) They boost stock prices as future earnings discounted at lower rates equates to higher present values. It entices risk-taking in stock and bond markets, when everything else remains constant.
International markets also had a mixed November with developed stock markets (MSCI EAFE) up 0.6% for the month and 27.4% this year. Emerging markets are having a strong year with the MSCI EM Index gaining 29.7% but dropped 2.4% last month. Korea (+77%), Mexico (+51%) and Hong Kong (+35%) have been the global stock market winners heading into the final month of trading.
Bonds continued their slow and steady rise in November. The Bloomberg US Aggregate Bond Index gained 0.62% during the month and 7.5% this year, handily outpacing inflation. Yields in the bond market have come down this year as the Fed restarted its easing cycle. Credit spreads remain relatively tight, as corporate fundamentals remain strong amid a growing economy. Attractive real yields in investment grade bonds should continue into next year as the Fed normalizes rate policy.
Sources: Morningstar Direct, Merrill Lynch, Wall Street Journal, First Trust, JPMorgan