The Week in Charts (12/3/23)

By Charlie Bilello

03 Dec 2023

View the video of this post on YouTube here.

The most important charts and themes in markets and investing

1) A November to Remember

In years to come, we’ll look back at November 2023 as one of the strongest months for financial markets in history:

  • The S&P 500 advanced 8.9%, its 18th biggest monthly gain since 1950.
  • The Bloomberg US Aggregate Bond Index closed 4.5% higher, its best month since May 1985 and 8th best return since inception of the index in 1976.
  • Everything moved higher in November with the exception of Crude Oil. But even the decline in Oil prices was not a true negative for it provided an additional boost to the rally. As Oil prices declined, so did inflation fears, interest rates, and expectations of any further tightening from the Fed. These favorable trends were the driving forces of one of the best months investors have ever seen.

2) Back From the Dead

“Why the 60/40 portfolio might be dead.” That was a headline at the end of October.

Right on cue: the US 60/40 Portfolio gained 7.3% in November, its 2nd best month in the past 30 years (trailing only April 2020) and 9th best since 1976.

Driving the move higher in stocks and bonds was the sharp decline in interest rates. The current 10-year Treasury yield of 4.22% is 76 bps below its October closing high (4.98%) while 2-year yields have fallen 63 bps (from 5.19% to 4.56%).

3) Bears Go Back Into Hibernation

The historic rally in the stock market during November did not go unnoticed by market participants.

Bears in the AAII Sentiment Poll moved from over 50% to under 20% during the month.

This is now the lowest bearish percentage since the first week of January in 2018, which came right after 2017’s record 12 straight up months.

What sent the bears back into hibernation?

Rising prices. The S&P 500 gained 8.9% in November, one of its best months ever.

Bulls now outnumber Bears by 29% in the AAII Sentiment Poll. Just 4 weeks ago, Bears outnumbered Bulls by 26%. The 55% swing from net bearish to net bullish is the largest 4-week improvement in sentiment since March-April 2009.

What happened in March-April 2009? Stocks had a vertical rally.

What happened in the last 4 weeks? Stocks had a vertical rally.

It’s counterintuitive, but investors always seem to get much more positive and excited about the future when prices are rapidly rising, which is the exact opposite of how shoppers behave.

4) Dow at New Highs

The Dow closed out November at a new total return high (including dividends), increasing 181% over the last decade (+10.9% annualized).

Here’s the breakdown of returns this year from the 30 Dow components. The top four stocks this year are all in the Technology sector (Salesforce, Intel, Microsoft, and Apple).

While the Dow is already at a new total return high, the S&P 500/Nasdaq 100 remain 1%/2% below their prior highs while the Russell 2000 (22% below) and ARK Innovation ETF (69% below) still have a ways to go.

5) A March Rate Cut?

The incoming data continues to show cooling inflation.

The PCE Price Index moved down to 3.0% in October, its lowest level since March 2021.

And Core PCE (excludes Food/Energy), the Fed’s preferred measure of inflation, moved down to 3.5%. This was the lowest level since April 2021.

The market is betting that the Fed is taking note, and will soon reverse course from what has been the tightest monetary policy since 2007 (Fed Funds Rate 1.8% above core PCE).

There’s now a 65% probability that the first Fed rate cut occurs in March 2024.

And after that, market participants are betting the cuts will continue, with the Fed Funds Rate moving down to 4.1% by the end of 2024 and 3.5% by the end of 2025.

Jerome Powell, however, is not giving any credence to these expectations. In a speech last week, he reiterated that talk of cutting rates was “premature” and additional rate hikes could still happen.

6) The Recession That Never Came

Perhaps the most important theme in 2023 was the widely predicted US recession that never came.

Third quarter real GDP was revised higher, showing a 5.2% annualized growth rate versus the initial reading of 4.9%.

Year-over-year growth now stands at 3.0%, the highest since Q1 2022.

Will we see another 5% growth rate in Q4?

Not likely. The current real GDP estimates from the Atlanta Fed and Wall Street are a little over 1%.

7) Unaffordable Homes to Buy, More Affordable Homes to Rent

US Home Prices hit another all-time high in September while affordability remains near record lows.

US housing affordability is worse today than the peak of the last housing bubble. The median American household would need to spend 44.7% of their income to afford the median priced home, a record high.

While homes have become increasingly more unaffordable to buy, the market for renters continues to slowly improve.

US Rents fell in November for the 4th consecutive month.

Over the past year, asking rents have declined 1%.

With vacancy rates rising and more supply coming to the market, we should see this trend continue in December.

8) Normalizing the Supply of Money

The unprecedented expansion of the money supply in 2020-21 (40% increase) was one of the main factors contributing to the spike in inflation during 2021 and 2022 while its trend lower of late has been a key driver of lower inflation.

The US Money Supply fell 3.3% over the last year, a record 11th consecutive month with a YoY decline.

The US Money Supply has fallen 2% over the last 2 years, the largest 2-year decline on record.

9) RIP, Charlie Munger

“You don’t have a lot of envy.

You don’t have a lot of resentment.

You don’t overspend your income.

You stay cheerful in spite of your troubles.

You deal with reliable people.

And you do what you’re supposed to do.”

-Charlie Munger on the secrets to a happy life

10) A Few Interesting Stats…

a) There were over 2.9 million US airline travelers on November 26, the busiest day for air travel in history.

b) Pending home sales in the US have moved down to their lowest level since April 2020, a month where much of US economy was shut down. The deep freeze in housing continues.

c) Contrary to popular belief, small cap underperformance has not been a bearish signal for markets (see video discussion here).

d) The low levels of consumer sentiment that we’ve seen consistently over the last year has historically been a bullish signal for stocks (see video discussion here).

e) Major asset class returns since 2011…

And that’s all for this week. Have a great Sunday and week ahead!


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