December 2, 2022
Market Monitor: November Update
Headlines and Highlights
- Markets extend autumn recovery: Global stocks climbed higher again last month as signs of cooling inflation boosted hopes the Federal Reserve will soon stop raising interest rates. Non-U.S. stocks surged on a 5% drop in the dollar as expectations of a less aggressive Fed sent many investors into foreign currencies. Benchmarks for international developed and emerging-markets stocks rose 13.2% and 15.6%, respectively, outperforming U.S. stocks’ single-digit gains. Bonds delivered their best monthly performance in years as yields declined. The November gains, however, left almost all asset classes still down substantially in 2022.
- Powell previews smaller rate hike: Fed Chair Jerome Powell signaled a coming slowdown in the central bank’s tightening but cautioned that rates need to keep rising and remain restrictive for some time to get inflation back to the 2% target. Powell’s comments reinforced expectations that the Fed will boost the federal funds rate by half a percentage point at the December 13-14 meeting following four straight three-quarter-point increases. He said slowing the pace of rate hikes is a good way to balance the risks of elevated inflation and a potential recession.
- China’s zero-Covid clampdown causing furor: Growing unrest in China over the government’s pandemic lockdowns have raised concerns about a ripple effect on the global economy, including supply chains. Besides producing the biggest protest movement in decades, Beijing’s restrictive zero-Covid strategy already has significantly slowed the world’s second-largest economy. China’s GDP is now expected to grow by 3.2% in 2022, well below the official target of 5.5% and the slowest growth in more than 40 years aside from the Covid-affected rate of 2020.
Selected Market Returns
Sources: Morningstar, Altair Advisers
Our Views
- The Fed’s publicly stated intention to moderate interest-rate hikes is a promising indication that the central bank will actively try to avoid overtightening, although its actions in early 2023 will be dictated by the path of inflation. Market expectations as measured by CME FedWatch are for the benchmark rate (currently 3.75%-4%) to rise to 4.75%-5% by March. Pushing it above that level without pausing could put undue strain on the economy, especially since the full impact of rate hikes is not known for months afterward.
- The latest inflation data reaffirm our belief that the pace of price rises has peaked and should continue to gradually descend while remaining above the target level throughout 2023. The personal consumption expenditures price index excluding food and energy, a preferred Fed inflation measure, posted the second-smallest monthly increase (0.2%) this year in October to reduce the year-over-year rise to 5.0% from 5.2% in September.
- Investors’ optimism about a softening of Fed policy has driven the strong rally in stocks since the market low in mid-October. While we expect further gains over the months ahead, markets will be subject to renewed volatility with any unexpected bump in inflation, new signs of the Fed being more aggressive than expected, or a significant worsening of economic data.
- Recent economic reports tell a mixed story as higher interest rates and inflation take a toll on the housing and manufacturing sectors, stretch consumers’ finances and weigh on sentiment. The overall outlook remains positive on balance, however, with the economy on pace for 2.8% growth in the fourth quarter (Atlanta Fed estimate), consumer spending increasing solidly in October, Black Friday retail sales rising from a year ago and the labor market still robust, including 263,000 jobs added in November. If a recession does occur in 2023, we believe it will be relatively mild.
- International developed stocks are now outperforming their U.S. peers for 2022 as a result of November’s double-digit returns. While the drop in the dollar’s value that spurred last month’s rally is unlikely to continue at such a rapid pace, we continue to believe in the benefits of diversification including an allocation to non-U.S. stocks.
The material shown is for informational purposes only. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, and actual results may differ materially from those anticipated in forward-looking statements. As a practical matter, no entity is able to accurately and consistently predict future market activities, and all investments are subject to the risk of loss. While efforts are made to ensure information contained herein is accurate, Altair Advisers LLC cannot guarantee the accuracy of all such information presented. Material contained in this publication should not be construed as accounting, legal, or tax advice