By Pete Biebel, Senior Vice President, Senior Investment Strategist
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By now, you’ve heard all about it: The stock market just had its best month of the year and one of the largest monthly gains in a couple decades. Where the S&P 500 Index (SPX) and the NASDAQ Composite Index (COMP) both fell just short of reaching their July highs, that old relic of an index, the Dow Jones Industrial Average (DJIA), hit a new high for the year. And, by some measures, the bond market had its best month since the 1980s. I have to admit, it was a pretty good month. Energy prices were lower, the rate of inflation continued to decline, the U.S. Federal Reserve (Fed) seemed less and less likely to hike its benchmark lending rate anymore, Black Friday and Cyber Monday sales smashed the old records, and the Packers beat the Lions on Thanksgiving Day.
Alas, that mega month is now departed. But rather than spewing a bunch of statistics about how great the month was, I feel a need to be a little more clinical regarding November’s demise. I think it would be helpful to dissect this monster of a month, in part to try to determine what gave it so much strength, and part to better gauge whether December can bring another monstrous month. An autopsy of the market internals in November might produce some forensic evidence that would provide hints on what to look for, and what to be on guard for, in the month ahead.
The stock and bond market gains of November rose out of the ashes of a very negative October. Both markets had atrophied to oversold extremes as that month was coming to an end. Investor bearishness, as measured by the American Association of Individual Investors (AAII) survey, had spiked to its highest level since the beginning of the year. Such an extreme reading is a reliable contrary indicator. So, some rebound rally, at a minimum, seemed likely.
It was a resuscitated bond market that helped to jumpstart stocks early in November. The yield on the benchmark 10-year Treasury notes, which ended October near 4.95%, plunged to near 4.5% in just the first three days of the month. And that yield continued to decline. With the help of less hawkish Fed comments and favorable inflation reports, the 10-year yield fell to 4.2% as of last Friday, its lowest level in three months.
That glint of bullishness in bonds was a spark of life for stocks. Not surprisingly, the seven mega-cap tech stocks, that have been responsible for most of the market’s gain this year, were easy targets for buyers. As a group, the “Magnificent Seven” rallied about 16% from its late October low through the first half of November. But the lower interest rates also rekindled stocks in interest rate-sensitive sectors. The Real Estate and the Utilities sectors, which were the biggest losers through the first ten months of the year, enjoyed healthy rebound rallies early in the month.
The lower interest rates also rejuvenated small-cap stocks. The Russell 2000 Index (RUT) was showing a year-to-date loss of more than 7% in late October. That deficit was nearly completely erased in just the first three days of the month. Midmonth, on the day the Consumer Price Index data was released, the major averages gained roughly 1.5% to 2.5% on the news; RUT rocketed 5.5% that day. Over the past five weeks, RUT jumped 14.2%, flipping its year-to-date performance to nearly a 6% gain.
Precious metals prices and foreign currencies also got healthier as a result of lower interest rates, which contributed to dollar weakness. The Wall Street Journal U.S. Dollar Index decline about 3% during November. Front-month gold futures, which were trading as low as $1832 per ounce in early October, ended last week near $2092, their highest level in more than three years. The British pound and the euro both gained 3% to 4% against the U.S. dollar during November.
The third-quarter earnings season was winding down as November unfolded, but the results were an additional shot in the arm for the stock market. This weekend’s Barron’s reported, “S&P 500 companies’ third-quarter net income was 4.1% higher than a year earlier, after three straight quarters of declines, according to Refinitiv. Earnings per share were up 7.1%, thanks to stock buybacks.”
Where early November was the “everything rallies” market, activity has been a little more selective recently. I want to exhume some details of recent market activity to illustrate how the pulse of the market may have changed. First, through the first three weeks of the month, COMP posted a larger weekly gain than SPX, which had a larger gain than DJIA each week. But that relative performance has flip-flopped in the past two weeks. Where DJIA added 2.42% for the week, SPX gained just 0.77% and COMP just 0.38%. Thursday alone accounted for much of that discrepancy. DJIA gained 520 points or 1.5% that day thanks to big gains in three of its component stocks, while SPX gained just 0.4% and COMP just 0.2%. Another factor that contributed to the flip in leadership is that five of the Magnificent Seven stocks were down last week. If those stocks, which have been the backbone of the market for the past six months, begin to falter, that could kick the legs out from under the overall market.
In a month that enjoyed a nearly uninterrupted rally, there was a potentially troubling development last week. On Wednesday morning, following a stronger-than-expected updated estimate of third-quarter gross domestic product (GDP), the major averages all gapped significantly higher on the market’s opening. SPX and COMP hit new rebound highs in the first minutes of trading. But much of the early gain was given back by the end of the first hour, and all of those early gains had been erased by midday. Both SPX and COMP ended the day near their lows and with losses. That pattern of new highs/reversal/end with a loss is a bad omen. Fortunately, the following morning’s report on personal consumption expenditures, the Fed’s favored measure of inflation, showed zero increase for October and a year-over-year increase of just 3.0%, down from 3.4% in the previous month. That news was more than enough to help the market forget the prior day’s reversal.
Another-potentially more threatening omen can be found in that AAII survey. The update last week showed bullishness, bearishness and the bull/bear spread all reaching extremely optimistic levels. That same condition in late July marked the top of the summer rebound. Those survey results strongly suggest that the November rebound rally is unlikely to see much follow-through in December.
SPX ended last week just a half-dozen points below the 4600 level. The index’s high for the year in July was just above 4607. It’s wide-open spaces above Friday’s close for the index. But the AAII survey is a warning that we may need a week or two of cooling off, at least, before SPX is likely to make substantial progress above 4600. The first alarm would be triggered if SPX falls below last Thursday’s low at 4537. That would mark the first lower low since late October and would likely be followed by an acceleration lower.
This week’s calendar of economic reports is loaded with employment news. Following the Job Openings and Labor Turnover Survey, or JOLTS, report on Tuesday, we’ll get updates on unemployment claims on Thursday. Watch the continuing claims number. Last week’s number, 1.927 million, was the highest of the year; that stat hasn’t been above 2 million since 2021. Friday brings the potentially impactful employment report. Some economists expect the unemployment rate could tick above 4%.
| Economic Calendar (12/4/23 – 12/8/23) | Previous | Consensus | |
| Monday 12/4/2023 | Factory Orders, October, M/M | +2.8% | -3.5% |
| Durable Goods Orders, October, M/M | -5.4% | -5.4% | |
| Tuesday 12/5/2023 | Services PMI, November | 50.8 | 50.8 |
| ISM Services, November | 51.8 | 52.5 | |
| JOLTS Job Openings, October | 9.6mm | 9.4mm | |
| Wednesday 12/6/2023 | ADP Employment, November | +113K | +120K |
| Trade Deficit, October | $61.5B | $64.0B | |
| Thursday 12/7/2023 | Initial Jobless Claims | 218K | 224K |
| Continuing Claims | 1,927K | 1,910K | |
| Wholesale Inventories, October, M/M | +0.2% | -0.2% | |
| Friday 12/8/2023 | Consumer Sentiment, December | 61.3 | 62.3 |
| Non-Farm Payrolls, November, M/M | +150K | +190K | |
| Unemployment Rate, November | 3.9% | 4.1% | |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Weekly Market Commentary/Market