Benjamin M. Lavine, CFA, CAIA, RICP
Chief Investment Officer, 3D
Data Source: Bloomberg
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November 2022 Highlights:
- November saw a continued recovery in global risk assets helped by a dovish speech from Fed Chair Jerome Powell on the final day of the month as well as stronger than expected consumer spending data and hopeful signs of China easing COVID lockdown restrictions. In November, the MSCI All-Country World Index (ACWI) returned 7.8%. MSCI China rose 29.7% recovering from the steep sell-off in October.
- Once again, the U.S. Federal Reserve took center stage and drove market volatility (both on the downside and the upside) throughout November despite other market-moving headlines, such as the collapse in digital assets/crypto exchanges, China Zero-COVID lockdowns, and November mid-term elections.
- Fed Chair Jerome Powell acknowledged that the Fed is monitoring more real-time data, having faced repeated criticism that it’s too reliant on backward-looking data. The Fed remains confident that its policy setting can strike the right balance to engineer a soft landing or at least a landing that is not hard enough to break the financial system and broader economy.
- Across major regions, International Developed and Emerging Markets outperformed the U.S. helped by improving inflation data across Europe and prospects of renewed global demand as China emerges from COVID lockdowns. In November, MSCI Pacific ex-Japan and MSCI Emerging Markets led major regions, returning +17.6% and +14.8%, respectively followed by MSCI Europe (+11.4%), MSCI Japan (+9.7%) and the S&P 500 (+5.6%). The U.S. dollar weakened considerably during the month over prospects of an end to Fed tightening.
- Within the U.S., U.S. smalls caps underperformed large caps, while value stocks performed in line with growth stocks, the latter benefiting from ‘high beta’ surges following the mid-month CPI release and the 11/30 Powell speech. The S&P 600 Index returned 4.2% versus 5.6% for the S&P 500. S&P Pure Value performed similarly to Pure Growth, returning 5.3% versus 5.4%, respectively.
- Across sectors, traditional cyclical sectors (Materials, Industrials) and Financials along with Interest Rate Sensitive sectors (Utilities, Real Estate) outperformed while Energy and Consumer Discretionary lagged, with the former hurt by lower oil prices and the latter by underperformance of large cap constituents.
- Among Risk Factors, High Quality, High Dividend and Value outperformed helped by exposure to cyclicals and financials, while Momentum underperformed partly due to the underperformance of the Energy sector which has handily outperformed over the past year and remains a large component within momentum baskets.
- Investment grade fixed income rallied on a sharp drop in long-term interest rates as well as narrower credit spreads across investment-grade sectors (mortgages, corporate credit. The 10-Year U.S. Treasury Yield dropped almost half a percent from the prior month, ending the month at 3.61%.
- The Bloomberg U.S. Aggregate Bond Index rose 3.7% for the month while the Global ex-U.S Aggregate returned 5.6%. Non-U.S. bonds and emerging market local currency bonds outperformed helped by U.S. dollar depreciation over prospects that the U.S. Fed would not be tightening as aggressively relative to other world central banks.
- S. high yield benefited from the U.S. equity rally and a drop in interest rates. The Bloomberg US High Yield Index returned 2.2%, while Bloomberg/Barclays Emerging Market Debt LC returned 7.1%.
- Within equity alternatives, Real Estate rose sharply following the Powell speech as lower interest rates can buttress valuations. Precious Metals rose following the mid-month CPI release that came in lower than expected while Commodities suffered from a sell-off in oil prices (Figure 31) and renewed China COVID lockdowns before recovering at month-end following the Powell speech. The S&P GSCI Commodities Index returned -1.7% for the month while Dow Jones REIT Index rose 6.0%. The S&P GSCI Precious Metals Index rose 7.4% for the month.
- Bottom line as we head into 2023: after peak Fed tightening expected in early 2023, a flattish outlook for the U.S. economy and earnings outlook punctuated by ex-U.S. global developments where China reopening remains the ‘delta’ on marginal supply and demand.
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