Data Source: Bloomberg

Highlights:

  • Pressured by a plunge in oil prices, the S&P 500 had sunk 3% during November but rallied to end the month up 2% following unexpected dovish comments from Fed Chairperson Jerome Powell and investor optimism over U.S./China discussions at the G20 meeting held in Argentina. 
  • Driven by a strong rebound in Chinese equities, MSCI Emerging Markets returned 4.1% versus 2% for the S&P 500.  Ex-U.S. Developed Markets were flat with Japan returning only 0.4% while Europe returned -0.9%.
  • Powell backtracked his hawkish October comments by hinting that the Fed may need to slow down the pace of rate hikes in 2019 and then suggested that the current interest rate level is ‘just below’ the theoretical neutral rate of interest. 
  • It also appears that the Fed is catching up to Fed funds futures contracts which only see two rate hikes (from the current 2.25% rate) in 2019.
  • Within the U.S., it was more of a mixed picture based on the relative performance of cyclical versus defensive sectors. 
  • Interest rate sensitive sectors such as real estate and utilities benefited from the drop in long-term Treasury yields while Materials benefited from signs of stabilization in industrial commodities (outside of energy).
  • Technology and energy sectors were the worst relative performers, with the former hurt by ongoing earnings release disappointments while the latter was hurt by the plunge in oil prices to $51/barrel (down from $76/barrel reached in early October).
  • November also saw U.S. small caps and value underperformance large caps and growth, which points to narrowing breadth (participation) in the market – not a positive sign that the U.S. economy is about to accelerate from current levels. 
  • From a risk-factor standpoint, low volatility and high dividend factor strategies outperformed value, momentum, and high quality.
  • Investors should be concerned that risk-based fixed income indicators such as U.S. Treasury term structure and credit spreads have not confirmed the equity rally and are still pointing to a weakening macro environment. 
  • Larger trade issues such as resolving China’s mercantilist practices (forced technology transfers, violation of intellectual property rights, support of state-owned enterprises) as well as geo-strategic issues (South Seas Island expansion) will likely not be resolved over the next 90 days, which could see trade conflicts flare up again in 2019.
  • Valuations across risky assets (price/earnings multiples in equities and credit spreads in fixed income) are more attractive following the October sell-off, but longer-term issues remain concerning the Fed / macro backdrop and U.S./China trade conflicts.  It is not clear whether we will see resolution of these issues in the near future.

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