November marked the second consecutive month of gains for stock markets, thanks to some positive surprises.
What happened
In November, all the main classes of stocks were up, happily for the second month in a row. Domestic stocks posted solid gains: Large-cap stocks rose by 5.59% and small caps by 4.17% (S&P 500 and 600 indexes). But the standout performance was from international stocks. Developed-market stocks rose by 11.26% and emerging-market stocks by 14.83% (MSCI EAFE and Emerging Markets indexes), helped by a decline in the dollar versus other currencies. Bonds were also up, with the Bloomberg U.S. Aggregate Bond Index rising by 3.68%. Market volatility was moderate, with the S&P 500 moving by +/- 1% on eight days.
Why it happened
This year has unfortunately seen a lot of negative surprises. However, in November, we saw how positive surprises can lift markets. On Nov. 10, the S&P 500 rose by a remarkable 5.55%. Why? The October inflation report (the consumer price index) showed a fall from 8.2% per year in September to 7.7%. The driver of share prices was that the fall was larger than expected, meaning that the Federal Reserve might not have to be so aggressive in raising interest rates. And on the last day of the month, Jerome Powell, the Federal Reserve chief, suggested that interest rate rises might not be as large as expected, and the S&P 500 rose by 3.12%. Of course, whether this turns out to be the case remains to be seen. And surprises, by their nature, are unpredictable.
The economic backdrop remains generally solid. After negative growth during the first half of the year, U.S. economic growth turned positive again in the third quarter. While the return to growth was welcome, the outlook remains uncertain, with some retailers expressing concerns about consumer spending. The labor market has remained resilient in the face of high inflation and economic uncertainty. Some big-name tech companies have announced layoffs, but so far this seems mostly contained to this sector.
What it means for you
Both stock and bond markets have seen improved performance since our last update, inflation was lower than expected for October, and the U.S. economy returned to positive growth – all encouraging signs. The inflation report reminds us that surprises can be positive as well as negative. Remember that stock prices tend to be based on forward-looking assessments by buyers and sellers of stocks – that’s why markets react to surprises (both good and bad) with volatility.
There will certainly be future surprises in store. Those new developments are inherently impossible to predict – that’s why we call them “surprises” – both in terms of when they’ll arrive and whether they will be good or bad news for stocks.
The same is true for bonds: For example, future news may indicate slower or faster than expected interest rate rises, which would lead to either higher or lower bond prices.
The bottom line is that there is no reason to expect that the recent positive performance in October and November will repeat itself in the next month. Markets still face significant uncertainty on multiple fronts, which means there’s still a chance of declines in coming months.
However, history shows that both bonds and stocks provide positive returns over longer periods of time. Remember that you’re not investing for just one month or even for one year. Short-term swings should not push you off the track toward your long-term financial planning goals.
As always, we’re here to help.
Neil Gilfedder
Senior Vice President, Portfolio Management
With more than 20 years of experience in portfolio management and research, Neil manages the team responsible for the operations and quality management of portfolio management for the Edelman Financial Engines wealth planning and workplace businesses, representing more than 1.3 million clients and more than $227 billion in assets.* Neil and his team also provide investment support for retail planners and workplace relationship managers. Before joining Edelman Financial Engines in 2014, Neil was Managing Director at MSCI, where he was Head of Applied Research and Business Manager of Research. Neil also worked at Barclays Global Investors. Neil received a B.A. in Philosophy and Economics from the University of York and an A.M. in Economics from Stanford University. He is a CFA charterholder.
*Firm statistics are quoted as of Sept. 30, 2022
This material was prepared for informational and/or educational purposes only. Although the information has been gathered from sources believed to be reliable, we do not guarantee its accuracy or completeness.
An index is a portfolio of specific securities (common examples are the S&P, DJIA, NASDAQ), the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. Past performance does not guarantee future results.
