Stocks Trade Higher for a Second Consecutive Month

Monthly Client Letter
Written By Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®
Christmas tree

Photo Credit: Raimond Klavins, Unsplash

Monthly Market Summary

  • The S&P 500 Index returned +5.6% during November, outperforming the Russell 2000 Index’s +2.2% return.

  • Cyclical sectors outperformed during November, with Materials (+11.7%) and Industrials (+7.8%) as the top two sectors. Energy (+1.3%) was the worst-performing sector as the price of oil declined -6.9%, followed by Consumer Discretionary (+1.5%), which was weighed down by Tesla’s underperformance.

  • Corporate investment grade bonds generated a +6.6% total return, significantly outperforming corporate high-yield bonds’ +3.4% total return.

  • The MSCI EAFE Index of global developed market stocks returned +13.2%, underperforming the MSCI Emerging Market Index’s +15.6% return.

Stocks & Bonds Trade Higher After Encouraging October Inflation Report

Stocks traded higher for a second consecutive month after another encouraging inflation report. Data showed the Consumer Price Index (CPI), which measures inflation, increased by 0.4% month-over-month during October. While October’s +0.4% reading was a repeat of September’s +0.4%, it was below the market’s +0.6% estimate. Compared to October 2021, the CPI increased by +7.8% year-over-year. It was the slowest annual pace of inflation since January 2022 and the fourth consecutive month that the pace of inflation slowed from the prior month. Investors cheered the report as fresh evidence that price pressures are easing after a period of high inflation.

The top story in the bond market was falling Treasury yields as investors wagered that a drop in inflation would allow the Federal Reserve to slow its interest rate hikes. Bonds traded higher as interest rates declined, and the U.S. Bond Aggregate generated a +3.8% total return. The equity market also traded higher, and the S&P 500 followed up October’s +8.1% rally with another +3.6% gain during November. International stocks joined in on the rally and significantly outperformed U.S. equities as the U.S. dollar weakened. Overall, November was a strong month across asset classes.

Market Internals Highlight Broad Participation During November

A look beyond the S&P 500’s headline return reveals strong market breadth. Breadth measures underlying strength or weakness based on the number of stocks advancing or declining and can be used to analyze market trends. A rising index with strong breadth indicates a large group of stocks participated in the index’s rise, while weak breadth means fewer stocks participated. In November, eight of the eleven S&P 500 sectors outperformed the broad S&P 500 index. In addition, 425 of the S&P 500’s 503 constituents traded higher during November. This data suggests investors are becoming more confident in the path forward. While it is encouraging to see such broad participation, markets will ultimately look for incoming economic data to support the latest rally.

Mega Cap Growth Stocks Underperform During 4Q22 Rally

Mega Cap Growth Stocks Underperform During 4Q22 Rally

Gasoline Prices Declined in November 2022

Inflation Expectations

Inflation Expectations

Quarterly S&P 500 EPS Estimates Revised Lower

Quarterly S&P 500 EPS Estimates Revised Lower

Actionable Advise

  • Investors with longer time horizons should seek quality stocks with reasonable valuations.

  • The market is currently trading at a price-to-earnings multiple of around 16, and many stocks are trading at a reasonable value.

  • Overall, we recommend that investors keep a close eye on their portfolios since economic headwinds coming into 2023 will challenge the market's recent strength, and investors may need to shift to a defensive posture.

Our Insights

Featured
Election Driven Rally Pushes US Equities Higher
Election Driven Rally Pushes US Equities Higher

Stocks traded higher this week, with most of the gains occurring after the election. The S&P 500 reached a new all-time high, nearing the key 6,000 level. The broader equity market rally was notable as investors priced in the Trump administration’s pro-growth, reflationary policies. The past few weeks have been packed with market-moving events, but the calendar is expected to settle down as we approach year-end.

Treasury Yields Rise Following the Fed’s September Rate Cut
Treasury Yields Rise Following the Fed’s September Rate Cut

Stocks finished October lower as investors navigated Q3 earnings, the upcoming election, and uncertain Federal Reserve policy. Treasury yields climbed as investors considered the possibility that the Fed may not cut interest rates as much as previously expected. Concerns about fiscal spending also drove Treasury yields higher, with expectations for continued high government spending regardless of the election outcome.

The Next Two Weeks are Filled With Market-Moving Events
The Next Two Weeks are Filled With Market-Moving Events

This week, stocks traded lower after several weeks of consistent gains. The S&P 500 dropped -0.5%, underperforming the Nasdaq 100's +0.3% gain but outperforming the Russell 2000's -2.8% return. The Magnificent 7 rose over +2%, making Growth the only factor to trade higher. The next two weeks are filled with market-moving events, and once they pass, stocks could rally into year-end.

Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

I am currently the Managing Partner for our independent investment advisory firm, Optima Capital Management. Together with my business partners, Todd Bendell CFP® and Clinton Steinhoff, we founded Optima Capital in 2019 as a forward-thinking wealth management firm that serves as an investment fiduciary and family office for high-net-worth individuals and families. In addition to being the Chief Compliance Officer, my role at Optima Capital is portfolio management. I have over 18 years of experience in managing investment strategies and portfolios. I specialize in using fundamental and technical analysis to build custom portfolios that utilize individual equities, bonds, and exchange-traded funds (ETFs). I began my financial services career with Merrill Lynch in 2003. At Merrill, I served in the leadership roles of Market Sales Manager and Senior Resident Director for the Scottsdale West Valley Market in Arizona. On Wall Street Magazine recognized me as one of the Top 100 Branch Managers in 2017. I am originally from Saginaw, Michigan, and a marketing graduate from the W.P. Carey School of Business at Arizona State University. I am a Certified Private Wealth Advisor® professional. The CPWA® certification program is an advanced credential created specifically for wealth managers who work with high net worth clients, focusing on the life cycle of wealth: accumulation, preservation, and distribution. In addition, I hold the following designations - Chartered Retirement Planning Counselor (CRPC®), Certified Divorce Financial Analyst (CDFA®), Certified Plan Fiduciary Advisor (CPFA), and Retirement Management Advisor (RMA®). In the community, I am a member of the Central Arizona Estate Planning Council (CAEPC) and serve as an alumni advisor and mentor to student organizations at Arizona State University. My interests include traveling, outdoors, fitness, leadership, entrepreneurship, minimalism, and computer science.

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