The U.S. economy continued its upward trajectory in November in parallel with its global economic counterparts. Third-quarter U.S. Real Gross Domestic Product (GDP) was revised up from 3.0% to a three-year-high reading of 3.3% on increases in business investment and government spending. The continued economic surge has been largely supported by a consistent and strengthening business investment backdrop and healthy consumer spending. Personal income, buoyed by growth in private sectors wages, rose 0.5% in October, markedly beating analyst expectations. The labor market added 261,000 jobs in October, rebounding significantly from hurricane-related disruptions in September. The unemployment rate now stands at 4.1%, a 17-year low, while consumer confidence stands at a 17-year high. Importantly, solid economic activity is also being experienced abroad. Eurozone GDP grew at 2.5% in the third quarter, its fastest pace since 2011. While global inflation expectations remain at or below central bank targets, synchronized global growth and increasing wage pressures may provide the impetus for an uptick in inflation in 2018 and beyond. As we enter the final month of the year, Wall Street will look to Washington with a heightened interest regarding the continued tax-reform conversation.
Global equity returns were generally strong in November with domestic markets topping their international counterparts. The Dow Jones Industrial Average rose an impressive 4.24%, reaching a new record of 24,300 points. The S&P 500 Index returned slightly over 3% with all 11 sectors posting positive return contributions. The technology-heavy NASDAQ was a relative laggard for the month, a rare event so far in 2017, as Technology shares are up almost 37% year-to-date. The dominance of “growth” over “value” stocks continued throughout much of the month before strongly reversing in the waning days of November, on continued economic strengthening and increasing expectations that the Republican tax bill will pass.
Yields on government bonds drifted higher in October, resulting in slightly negative returns for all but the shortest maturity bonds. Corporate bond spreads continued to narrow throughout the month and remain at levels not seen since before the financial crisis. The Federal Reserve maintained its target rate of 1.25% at their most recent meeting, but signaled that a December rate hike is a strong possibility. The December meeting should also provide more clarity regarding the Fed’s plan to unwind its $4.5 trillion securities portfolio. Jerome Powell will likely replace Janet Yellen as Fed Chair after her term expires in February. Powell has been a supporter of Yellen and Fed policy is not expected to materially change under Powell’s watch.Yields on government and corporate bonds drifted higher in November, resulting in negative returns for all but the shortest maturity bonds. The U.S. 2-year Treasury yield finished the month yielding 1.69%, a nine-year high. The Federal Reserve maintained its target rate of 1.25% at their October meeting, but will likely raise rates in December and have hinted at up to four more rate hikes in 2018 if prospects for economic growth remain robust. The Fed Chair nominee, Jerome Powell, is expected to maintain the Fed’s plan to unwind its $4.5 trillion securities portfolio. Powell is widely expected to continue the essential elements of Fed policy established and implemented by the current Chair, Janet Yellen, whose term expires in February.