In this Market Update, we look back at the global financial markets in November, provide an outlook for the months ahead and explain how we adjusted our portfolios in the last rebalancing.
Economic situation
Despite the current high interest rates, the US economy remains robust, with recent quarterly GDP results more indicative of an economic boom than a recession. The unemployment rate in the USA has reached its lowest level in 50 years. Coupled with positive real wage growth amidst high inflation, the strong labor market acts as a buffer, helping the economy withstand higher interest rates for now.
The situation on the markets
In November, the dynamic relationship between bond yields and stock prices remained a key focus. The stock market is currently showing significant sensitivity to fluctuations in returns. Over the past few months, yields on ten-year US government bonds have fluctuated between 4 and 5 percent. At these levels, any further uptick in yields tends to prompt negative responses in equity returns. This is primarily because rising bond yields can adversely affect equity valuations, leading to increased capital costs, reduced margins, and lower future cash flows. However, the trend shifted in November, with declining bond yields contributing to notable increases in stock prices.
The impact on the asset classes equities and bonds
Equities
Following a three-month correction in equity prices, a combination of high risk aversion, negative investor sentiment, and substantial cash holdings among global fund managers set the stage for a rebound in November.
The stock market experienced a significant rally, with the S&P 500 advancing by 9.1%, the Dow Jones Industrial Average climbing 9.2%, and the NASDAQ surging 10.8%. This rally was sparked by unexpectedly low US inflation data, prompting global indices to also post gains of 8% and above.
Additionally, volatility levels in the USA, Europe, and Switzerland have dropped to their lowest since the onset of the coronavirus crisis.
Bonds
Treasury yields saw a notable decline in November as investors shifted back to equities. Yields on both the 5-year and 10-year treasuries fell by 51 basis points, marking the most significant drop across the yield curve.
The surprisingly robust economic development in the USA is perceived as a key driver for the rising yields on longer-term bonds.
What are the implications for the Everon portfolios?
November stood out as the best month of the year for equities. Our adjustments in previous months, particularly towards broader diversification in the Multifactor strategies with an increased number of individual stocks, paid off. Coupled with the positive trends in the equity markets, these adjustments enabled us to achieve positive performances ranging from 5 to 9% in November in all strategies within the equity sector. We continue to maintain a broad diversification and a large number of individual stocks.
