The last week of the month served up another dose of gung-ho sentiment that has largely characterised the month of November, with bonds and equities continuing to rally. Inflation data released last week in the US and Eurozone was in line (US) or better (Eurozone) than expected, adding fuel-to-the-fire that the Fed and ECB were finished with their rate hikes. Moreover, the favourable inflation data brought forward expectations of easing by both central banks. The Fed talking heads have not said as much directly, although they are implying that the rate hiking cycle is done. Mr Powell implied something similar during a speech he made to a university in Atlanta on Friday, although he cautioned that the Fed might not be done and remains data-dependent. Nonetheless, the market (as usual) interpreted his comments as dovish, and risk markets and bonds got an extra boost in the Friday afternoon session.
I can see the case for the ECB easing first, since economic growth in Europe is just a shade above stagnant and disinflation is accelerating. I struggle more to see the case for the Fed reversing course as soon, since growth remains robust in the US and the jobs market appears solid. Eventually, higher rates will bite, but we simply don’t appear to be there yet. For example, it has been reported that the use of credit (“buy now, pay later” schemes) over the Black Friday to Cyber Monday period pushed this important four-day retail period to a record in the US. Even supply cuts by OPEC+ announced on Thursday couldn’t stop the amazing momentum that has been built during November, the best month for the S&P 500 since July 2022. The table below shows the monthly returns of several of the asset classes I used in an article earlier this week entitled “Personal portfolio allocation.” As it illustrates, November was an exceptional month for stocks, Treasuries and corporate bonds.
There are plenty of other risk-on indicators, including tightening credit spreads and declining volatility indices. The VIX closed at its lowest level (12.63) since before the pandemic in early January 2020, as risk continues to be stripped out of US equities. The MOVE index, a similar measure of volatility for bonds, also declined although it remains significantly elevated vis-à-vis the period before the Fed started its tightening policy in March 2022. As the Dollar and oil decline, it looks like “all systems go” for the moment.
My fear, which I will put out there, is that it feels like “too much, too soon” in my book. I think the Fed will hold the line on rates unless it capitulates to an economy that worsens much faster than expected. Investors are certainly pricing in a dovish tilt sooner now, with the CME FedWatch Tool bringing forward its first Fed Funds rate cut to March 2024. Lastly, lest it go unsaid, there are other signals – like record gold prices and long-term yields declining quickly – that send counter-signals as far as the direction of the economy and level of risk.
Let me touch on markets first this week, but should you wish to go straight to the drivers of last week’s performance, you can access them in a section “Drivers of last week’s sentiment” or at the links below.
In case you are wondering about the photo for this article, that is a photo from the one and only Berkshire Hathaway annual meeting I attended in May 2018. I will never forget it. You can read more about the passing of Mr Munger, and Berkshire generally, further below.
MARKETS LAST WEEK
Stocks were generally better in most parts of the world last week, ending a month in which every index I track was higher. Gains were most robust in the US, arguably deserved given the ongoing strong economic performance. Japan and emerging markets also delivered solid monthly performances. European bourses rallied strongly last week off of growing conviction that the ECB is done its rate hikes and will soon reverse course to stimulate its moribund economy.
In the US, the rally in equities was experienced across the four indices that EMC tracks. Most notable perhaps was the rally in the value-oriented Russell 2000 which had its best month by far since January. These small- to mid-market companies are the ones that are most likely to be reliant on debt in their capital structures, so should benefit from lower yields. As has been the case for most of the year though, the NASDAQ was the leader among US indices for the month of November, as tech continues to strengthen and consolidate. However, it was the “more boring” Russell 2000 and the DJIA that were the best performers towards the end of the month, perhaps signalling a shift into more defensive stocks as tech stocks reach nose-bleed high valuations.
Treasury yields declined sharply across the curve last week. Investors that extended duration when the 10y UST was hovering around 5% have made a killing. The yield on the UST 10y UST has declined 76bps since it peaked on October 19th, with investors in the 7y-10y UST total return index earning a cool 4.4% in November alone. The longer duration (20y) UST total return index did even better, outperforming the S&P 500 in November by generating a sizzling 9.6% return.
Corporate credit also benefited from the risk-on sentiment in November as spreads continue to grind tighter in both investment grade (23bps tighter MoM) and non-investment grade (high yield, 5bbps tighter Mom). Investors in corporate bonds have done very well this year, certainly better than had they been invested in intermediate to long-term US Treasuries
The US Dollar remained under pressure, although I continue to be perplexed as to exactly why given other countries’ weaker economies and higher likelihood of trimming rates well before the Fed. The weaker USD helps US companies of course, and also alleviates pressure on emerging markets countries. There is a complex relationship with gold too, which has been on an absolute tear as it closed at an all-time high of $2,091/oz on Friday.
In summary, if you were long anything in November, you have to be thrilled! I doubt December will be as easy.
DRIVERS OF SENTIMENT LAST WEEK
Death of Charlie Munger / Berkshire Hathaway
The passing of Charlie Munger perhaps wasn’t surprising in that this amazing investor was nearly 100 years old. Mr Munger had so many interesting quotes that it would be difficult to list them all, and you can find them all over the mainstream financial press earlier this week. His investment acumen was second-to-none, acting as Warren Buffet’s side-kick and alter-ego. The performance of Berkshire over the years speaks for itself, as you can see in the graph below that compares BRK.B share price (blue line) to the S&P 500 (green line).
Naturally, the question arises as to the future of Berkshire with one of the “dynamic duo” now gone. This is relatively simple in that both Messrs. Munger and Buffet are well over 90 years old, and succession planning has been enshrined in the company for many years, groomed by the “dynamic duo.” Although Mr Buffet remains chairman, there is little doubt that the hand-selected and now two remaining Vice Chairmen – Greg Abel (non-insurance) and Ajit Jain (insurance) – have been running their respective divisions at the company alongside Mr Buffet and the late Mr Munger for many years. Perhaps the performance of the share price since Mr Munger’s passing was announced best illustrates investors’ ongoing confidence in Berkshire, with the stock down only a touch during the week. Perhaps the thing I most admire about Berkshire, which remains my largest holding in my personal portfolio, is their ability to be patient and to use their significant cash on hand ($157.2 billion) to capitalise on severe market disruptions. Their philosophy all along has been oriented towards value, an approach that is less fashionable today as fast-money investors lean into momentum and high-growth opportunities, seeking immediate gratification. What a privilege it was for me to travel to Omaha in 2018 to attend the Berkshire annual shareholder (and Board) meeting, often described as similar to a “[music] festival for geeks.” I was up early to queue to get into the annual meeting, and not everyone in the queue got into the huge auditorium. The entire weekend was electric, and I highly recommend that if you are a BRK shareholder that you consider going to Omaha one of these days to an annual meeting. The cult following of this company and its two historic leaders was amazing to see and experience. I will never forget it. RIP Charlie Munger.
Black Friday sales
Sales for the four day period from Black Friday to Cyber Monday reached record levels in the US, according to Adobe Analytics (here). One mode of purchase highlighted by Adobe was record use of “buy now, pay later” programmes. The graph below from #Bloomberg shows the trend in Cyber Monday sales since 2014.
The US consumer continues to spend, spend, spend, driving the US economy forward.
(Dis)inflation in the US and Eurozone
Eurozone headline inflation is expected to have fallen to 2.4% YoY in November compared to 2.9% YoY in October, according to Eurostat (here). Core CPI in November is estimated to be 3.6% YoY, compared to 4.2% for October YoY. The November estimates suggest that inflation is slowing more quickly than consensus expectations. Considering that economic growth is slowing more quickly in Europe than in the US, the disinflation news is welcome although perhaps not surprising It does potentially bring forward the potential date of an ECB pivot, because the European economy appears to be slowing quickly.
PCE data for October was also released on Thursday (BEA release here), and came in just as expected, supporting ongoing disinflation in the US, too, albeit not to the degree as in the common currency bloc. Headline PCE declined in October to 3.0% YoY, and core PCE declined to 3.5% YoY. Here’s the summary in table format.
US 3Q23 GDP (revised)
US 3Q23 real GDP was revised up from 4.9% to 5.2% by the BEA, illustrating the strong growth that the US economy experienced in the third quarter (BEA revised GDP release here).
OPEC+ (and US gas prices at the pump)
OPEC+ announced further voluntary daily supply reductions of 2.2 million barrels/day following its virtual meeting on Thursday, in an attempt to halt the steady decline in oil prices. My followers know my views on price manipulation by OPEC+, and I am not surprised to see oil markets hardly acknowledge this supply reduction. Brent is 14% off its Sept 26th high for the year, and WTI crude (US-focused) is 21% off its Sept 27th high for the year. The reality is that higher prices have brought more non-OEPC+ supply on line, especially in the US. I’m simply not a fan of market manipulation, and oil is now being driven mostly by demand rather than supply factors anyway. Good luck OPEC+. For the US consumer, the good news is that that the national average for regular petrol at the pump is $3.25/gallon, a significant decline from the high of $5.02/gallon experienced in June 2022.
The tables below provide detail across various global and US equity indices, the US Treasury market, corporate bonds and various other asset classes.
Corporate bonds (credit)
Safe haven and other assets