by Jeremy Bryan

It was a very positive return month for stocks and bonds in November. After economic reports that reflected a calming inflation environment, assets rose in anticipation of a pause and potential reversal in restrictive Fed policy. As a result, November’s performance was one of the strongest months in several years.

As we stated in October, interest rate trends have been the predominant driver of market performance. Through summer and into the fall, interest rates rose at an accelerated pace and stocks and bonds were pressured as a result. During November, the inflation readings came in below expectations which set off a significant move downward in long-term interest rates. Investor sentiment has now shifted from expectations of continued Federal Reserve interest rate increases to looking at the potential for an extended pause and even potential cuts in 2024.

Further, while inflation is slowing, economic health remains relatively resilient. Job growth and the unemployment rate are holding relatively steady, and recent updates from companies show that consumers and businesses are still spending.

The bond market responded positively, as long-term interest rate declines have a positive influence on bond prices. Stocks followed the cues from bonds and economic data and also turned higher.  Historical precedent shows that the stock market in the fourth quarter is often strong after a middling September. While October did not provide the respite from selling pressure, November’s performance was a welcome change of pace. Further strengthening this rally was the broader nature of the performance. After most of the year-to-date returns were driven by relatively few stocks, the performance in November had U.S. small-cap and international stocks performing in a similar fashion to their U.S. large-cap counterparts.

As we close the year, investors clearly have some tailwinds in their favor. Economic data is in the “sweet spot” between still growing but slowing enough for inflation to be better controlled. If these trends continue, this should ease the pressure on the Fed to continue to raise interest rates. The U.S. government, and our elected officials, have come together for a short-term compromise to avoid (for now) a government shutdown. Lastly, and most importantly for the stock market, corporate earnings have largely concluded with better-than-expected results in most sectors and with data suggesting that end market demand is resilient.

A word of caution, however, is that markets rarely go up in a straight line.

November was a very strong month and there is reason to be optimistic that these trends could continue. However, in the short term, investor sentiment and market performance can be fickle and turn on a dime. It is typically the unforeseen events that cause the most disruption. The markets are rarely, if ever, without concerns. Concerns are often present even in very good markets and a level of prudence and humility is typically a valuable strategy to guide investors in good times and bad.

In that regard, there is no need to significantly alter your investment plan to chase a rising market. A more prudent strategy is to assess whether your allocation to growth and safety assets is an accurate reflection of your long-term goals and risk tolerance. Using this as the guide, and doing the homework upfront, allows investors to stay the course during difficult times while still benefiting from the good times the market often provides. Lastly, this type of planning can overcome the pitfalls of increasing and decreasing risk based on emotion, which usually erodes rather than improves performance.

To expand on these Market Commentaries or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222.