Giving Thanks...
For Many Things

November 2023



Let us check in on what has transpired since we last shared an update, starting with two of the uncertainties mentioned last month.

We'll begin with politics. We have avoided a government shutdown — for now. Congress gave the final approval for a bill to fund the government into early next year. It is another stopgap measure, scuttling any hopes for a longer-term agreement, so we have essentially only kicked that “uncertainty can” down the road again. Nonetheless, the remainder of the year and its path for the markets now has fewer hurdles.

On the geopolitical front, the good news is that things have not worsened materially, but uncertainty still exists.

The war between Israel and Hamas has not spread throughout the region to a degree that would be disruptive to the global economy.

Xi and Biden met (a good thing); they agreed on a few topics (encouraging); and Xi said the world is big enough for both the U.S. and China to be successful – better than a stick in the eye.

For the economy and markets, the most impactful news came from some benign inflation reports, coupled with better-than-expected economic news. The October CPI print propelled both stock and bond prices upward dramatically. The 10-year treasury yield, which briefly touched 5% last month, has dropped all the way down to the 4.5% range.

We saw similar moves across various fixed income assets (taxable and tax-exempt). The Bloomberg Aggregate Bond Index is up over 3% month-to-date — revealing quite a change in investor attitude from the negative reaction to the disappointing treasury auction just a week prior.

U.S. stocks, after falling in September and October, were already recovering in November, but the CPI report hit the turbo button.

As encouraging as the CPI report was, it was only one data point — but further good news followed soon. The PPI report told a similar story of moderating inflation. In addition, retail sales were better than expected, perhaps indicating that consumers are getting into the holiday shopping mood early.

As a result, we are seeing a positive month for most major stock indices across the globe, with some quite strong. The S&P 500 is up over 7% month-to-date as of filming, and the All Country World Index is up over 6%, indicating that Asia and Europe are getting in on the fun.

Encouragingly, breadth has also improved in the U.S. broad market recently. It is not just the same seven tech titans driving returns.

Both growth and value are participating in the improvement, and small and mid-cap are having a good month as well. This is good news — you have heard us argue that healthy bull markets usually have broader participation than we saw in the first half of 2023.

So, how optimistic should investors be?

Could it be that all of the Fed's efforts are having the desired effect on inflation? As a result, might the current tightening wave be over, with perhaps an easing cycle just around the corner?

We think it is premature to sound the all clear.

Fed Chair Powell has not closed the door on future interest rate hikes. He has softened his tone somewhat by saying there is no urgent need to raise rates further because inflation is easing.

However, at the IMF event, he stated that the Fed is not confident that the federal funds rate is sufficiently high enough to reduce inflation to target.

In other words, things are getting better, but not quite where we want them yet.

October inflation data were encouraging, but we need to see more improvement — so we are sticking with our higher-for-longer thesis for now, but are more optimistic about the path forward.

Chart 1: 3:54 — Talk of a soft landing is increasing, and recent data suggest a greater probability of this. We think there is a 40% chance the Fed will thread the needle, subdue inflation, and avoid stalling the economy. The chance of recession is decreasing; however, we are a bit more cautious than the consensus estimates. Our base case still calls for a 60% chance of a mild recession in early 2024.

Finally, a comment on corporate earnings: Third-quarter earnings largely came in ahead of estimates. However, fourth-quarter guidance and forecast continue to decline. We still think consensus estimates are too optimistic for the first half of 2024. As a result, we are not ready to increase equity allocations and portfolios.

Valuations in some segments are looking more compelling, even with the recent run, but with our near-term concerns about corporate earnings, we are not yet compelled. We do expect earnings to reaccelerate in the second half of next year.

To close, we are thankful for the recent economic data and positive market action. More so, we are thankful for your relationship and the opportunity to work with you.

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