After a healthy dose of volatility in August and October, the markets were fairly calm in November, with all three major indices ending the month near where they began. Third-quarter GDP was revised upward from 1.5% to 2.1%, with the revision driven by a boost in inventory levels. Consumer spending was revised lower but remained strong, up 3.2% year-over-year following a 3.3% increase in the second quarter. The weekend after Thanksgiving showed sales falling in physical stores but rising significantly online. Unemployment fell to about 5% in the month while current job openings rose to near an all-time high, indicating the labor market is nearing full employment. The Fed released their meeting minutes indicating that “most” officials believe a rate hike is warranted following the December meeting. With core CPI inflation just slightly below the Fed’s mandate of 2%, and diminishing slack in the labor market, a rate hike before the end of the year is appearing more likely. According to CNBC, markets are placing the odds of a December rate hike at about 75%. The dollar appreciated against the Euro in November as the prospect of higher rates created more demand. Headwinds for the U.S. economy include some deterioration in various manufacturing readings, with the ISM falling to 48.6 in the month – a reading below 50 indicates a contraction. In addition, consumer confidence fell unexpectedly to its lowest level in over a year as Americans became less optimistic about the job market outlook.
The NASDAQ led the way in November with just over a 1% increase as large-cap tech stocks continued to outperform. The S&P 500 and the Dow Jones Industrial Average each rose less than 1% for the month. Stock prices surged in mid- November after Fed comments suggested a probable December rate hike. Although the world experienced some geopolitical shocks in November, including terrorist attacks in Paris and a Russian fighter jet shot down by Turkey, equity markets did not show much of a reaction. In fact, oil prices ended more than 10% lower for the month while they typically rise in reaction to geopolitical tensions. Lower commodity prices continue to be a drag on Emerging Markets (EM), down nearly 13% YTD. The primary drag on EM performance is the severe depreciation in EM currencies versus the dollar.
The U.S. yield curve has started to flatten as a December rate hike is increasingly priced into the markets. Year-to-date, yields on 1-, 2– and 3-yr Treasuries are up 121%, 42%, and 16%, compared to the 7-, 10– and 30-year Treasuries which are up 2%, 3%, and 9%, respectively. Indicatively, the spread between 30-year and 1-year Treasuries has narrowed 133 basis points, or 34%, from January through November. The yield gap between U.S. government bonds and European bonds continues to widen as central bank actions are moving in opposite directions, with more stimulus expected from the European Central Bank by year end and projected tightening from the Fed. The gap between yields on 2-year U.S. and euro zone government bonds is the widest its been in nine years.