In a stark reversal, bonds and stocks rose significantly last month. The upward pressure of inflation on interest rates continued to ease in developed economies [1], and markets remained hopeful for a US “soft landing” with slowing inflation, lower interest rates, and a shallow economic slowdown. In this piece, we briefly summarize November in the market and economy, and survey the potential rewards and risks ahead.

Market

Both US and international stocks surged 8% to 10% last month, depending on the index [2]. Major bond indices also rose, with the Bloomberg US Aggregate and the FTSE Non-USD World Government Bond indices gaining 4.53% and 5.95% respectively [2].

Economy

The likelihood of broad recession among developed nations is rapidly increasing. The Euro Area and Japanese economies officially shrank last quarter: 0.1% [3] and 0.5% [4], respectively. The United States GDP growth rate is positive [5], although its leading indicators are generally negative [6]. The effect of recessions on the stock market is unclear [7].

Currency crises plaguing other parts of the world, such as Turkey and Argentina, are drawing our attention. While they have little direct global impact, they could serve as roadmaps should larger economies encounter similar issues.

US Technology Stocks

Despite the challenging global economic climate, you have likely heard positive things about the technology sector of the United States – it is undeniably important and dynamic. Microsoft, Google, Apple, and NVIDIA, among others, provide substantial value to consumers, businesses, and governments. Additionally, advancements in artificial intelligence may add yet another dimension of value to the sector.

However, a comprehensive investment assessment necessitates a comparison of potential profits to stock values. By these measures, the stocks are unappealing: they are the largest weight in the US stock market, their price-to-projected profits are much higher than average, and they have already performed spectacularly in recent years [8]. For these “valuation” reasons, we are slightly negative on the sector’s investment prospects.

Looking ahead

While we welcome last month’s boost to both stocks and bonds, we are closely monitoring the continued co-movement of these two major asset classes. Presently, the S&P 500 and 10-year Treasury yield correlation is negative [6], indicating that US stock prices and US bond prices are rising and falling together.

Our investment philosophy prioritizes diversification – we seek investments that react differently and, therefore, work well with each other during times of market stress. If the fundamental relationship between asset classes shifts, reducing potential diversification benefits, we will adjust our portfolio construction accordingly.

For appropriate clients, we recently introduced a new portfolio position with exposure to short-term, high-quality commercial mortgage-backed securities (CMBS). We believe this change will bolster overall portfolio resiliency, reduce interest rate sensitivity, and enhance potential return.

As we gather new evidence and carefully cross-reference it with available investment opportunities, we may implement additional changes in 2024. We are always searching for ways to adapt and improve our clients’ chances of financial success.

Happy Holidays and Happy New Year!

Interested in discussing the markets and your portfolio? Contact us, we’re here to help.

¹ OECD: Consumer Prices, OECD, https://www.oecd.org/newsroom/consumer-prices-oecd-updated-7-november-2023.htm

² Invesco: Markets Review At-a-Glance, Ended 30 November 2023

³ Trading Economics: Euro Area GDP Growth Rate, https://tradingeconomics.com/euro-area/gdp-growth

⁴ Trading Economics: Japan GDP Growth Rate, https://tradingeconomics.com/japan/gdp-growth

⁵ Trading Economics: United States GDP Growth Rate, https://tradingeconomics.com/united-states/gdp-growth

⁶ Charles Schwab: US Outlook: One Thing Leads to Another, https://www.schwab.com/learn/story/us-outlook-one-thing-leads-to-another

⁷ Dimensional Fund Advisors: Market Returns through a Century of Recessions, https://www.dimensional.com/us-en/insights/market-returns-through-a-century-of-recessions

⁸ J.P. Morgan: Guide to the Markets, 4Q 2023, As of November 30, 2023, slide 14, https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not consider any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. This communication may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

Generally, among asset classes, stocks are more volatile than bonds or short-term instruments. Government bonds and corporate bonds have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns. U.S. Treasury Bills maintain a stable value if held to maturity, but returns are generally only slightly above the inflation rate.

Diversification does not ensure a profit or guarantee against loss.

KLR Investment Advisors LLC (“KLRIA”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where KLR Investment and its representatives are properly licensed or exempt from licensure.