Better Than Expected Economic Data in November

Economic Overview

Better than expected economic data in November appears to be thwarting the FOMC's efforts to engineer lower short-term interest rates. While good news for the US economy, this continued economic strength could pose challenges for investors should the Fed pause further interest rate reductions.

The Unemployment Rate in October held steady at 4.1%, while Average Hourly Earnings ticked up a stronger than expected +0.4% MoM, and have now risen +4.0% year over year. Weekly Initial Jobless Claims were fairly steady in November coming in around 215k, while Continuing Claims hovered around 1,900k. All in all the labor market continues to exhibit strength as we approach year-end, potentially helping contribute to a strong holiday shopping season.

Inflation remained steady in October, though stubbornly above the Fed's stated goal of 2.0%. The Consumer Price Index (CPI) rose +0.2% MoM and +2.6% YoY, while ex-food & energy, prices rose +0.3% MoM and +3.3% YoY. At the wholesale level, the Producer Price Index edged

up +0.2% MoM and +2.4% YoY, while Core PPI rose +0.3% MoM and +3.1% YoY. Lastly, the Core PCE Price Index ticked higher by +0.3% for the month and +2.8% YoY. None of these numbers should give the Fed confidence that it can achieve its stated goal of targeting 2.0% inflation, and investors are left to wonder if further easing is warranted.

The housing market remains a key component of the inflation mix, with the S&P CoreLogic CS 20-City Index rising +0.2% in September and +4.6% YoY. Existing Home Sales for October rose a better than expected +3.4% MoM although New Home Sales fell -17.3% from the month before. Higher interest rates, and the resulting higher mortgage rates, have hampered supply of available for sale housing stock with many homeowners having borrowed at 3-4% reluctant to sell only to have to borrow at 6-7% rates.

The Fed’s initial 50 basis point cut in September may have proven overly aggressive given the current spate of solid economic data. With 3rd quarter GDP showing 2.8% economic growth, future Fed cuts remain in doubt. Investors betting on materially lower short-term interest rates may be disappointed. As the new administration sets its priorities for 2025 and beyond, continued deficit spending should set a floor on how low government bond yields can go. Should “tariff talk” escalate into a full-blown trade war, global growth prospects would likely wane, taking some pressure off of the Fed and potentially allowing for further rate cuts.

Domestic Equity

U.S. equities surged in November with the benchmark S&P 500 Index gaining +5.9% during the month to close at 6,032. Mid- and Small-Caps outperformed, with the Mid-Cap 400 and Small-Cap 600 Indices returning +8.8% and +10.9%, respectively. Generally speaking, economic data continued to be robust, despite mixed earnings results from Q3 earnings season. Markets broadly cheered the results of the Election, powering major indices to new highs, despite higher interest rates.

Perhaps more importantly, the equity market continued to broaden out, with stocks of all shapes and sizes rallying. The S&P 500 Equal Weight Index gained +6.4% during the period, outperforming the market capitalization weighted S&P 500. The aforementioned Small- and Mid-Cap Indices posted robust gains, again outperforming the market. Cyclical sectors such as Financials (+10.3%), Industrials (+7.5%) and Energy (+6.9%) outperformed during the monthwhile defensives lagged. Also notable was the lack of leadership from the Technology and Communication Services sectors, which posted gains of only +4.7% and +3.1%, respectively during the month, after leading the market higher for most of the year. Technology and Communication Services remain two of the best performing sector year to date, up +35.1% and +35.4%, respectively, but the baton appears to have been passed. Financials are now firmly the best performing sector year to date with gains of +38.1%. What’s more, they’re also the best performing sector over the trailing 12 months, up over +45.5%.

Interestingly, over the past year, Large-, Mid-, and Small-Caps have all posted returns with spitting distance of each other, gaining +33.9%, +33.4%, and +33.2%, respectively. However, for the four month period of July through November 2024, Small- and Mid-Cap performance has handily trounced Large-Cap, with returns of +19.9%, +16.7%, and +10.8%, respectively, as softer inflation and stronger economic data have propelled SMID-Caps, and may be just the beginning of a great rotation that buoys the rest of the market.

Looking forward, all eyes should remain focused on incoming economic data and the upcoming Federal Open Market Committee (FOMC) meeting. While markets have soared post-Election, uncertainty around potential tariffs and rate cuts remain. It will be important to analyze the upcoming Summary of Economic Projections (SEP) when the Fed concludes its two day meeting on December 18. How markets may react to the potential for fewer rate cuts in 2025 remains a mystery, and could cause a renewed bout of volatility heading into next year.

International Equity

Internationally, markets were mixed but generally positive. The MSCI EAFE Index, which tracks developed markets outside the U.S. and Canada, faced some challenges but showed some resilience amid global shifts, finishing the month down -0.6%. European markets struggled with the French CAC 40 index declining by -1.5% due to disappointing earnings from several key companies and ongoing concerns about inflation impacting consumer spending. Ireland has been a pleasant surprise this year with the Irish ISEQ index up +13.2% YTD, driven by strong performance in the technology and pharmaceutical sectors. Ireland has enjoyed a vast influx of corporate tax revenue from U.S. multinationals, which the government has used to splurge on infrastructure projects, helping to propel economic growth in the country.

Emerging markets faced headwinds, with the MSCI Emerging Markets Index falling by -3.6%. China, is the largest single country allocation, making up 27.4% of the index. China was down -4.3% on the month, continuing a poor quarter. The announcement of additional tariffs by U.S. President-elect Donald Trump on Chinese goods has fueled uncertainty among investors. This development raised fears of escalating trade tensions, which historically have adverse effects on the Chinese economy and its stock market. Tariffs coupled with a struggling property market have hurt investor sentiment in the world’s second largest economy. There has been a lack of bold reforms and tangible support measures from the government despite previous stimulus announcements. Investors are cautious, waiting for more decisive actions from Beijing to sustain economic momentum.

Canada was one of the best performing countries on the month, increasing +7.2%. Key sectors in the Canadian market such as financial services, materials, and energy played a crucial role, driving market gains. Financials, which are the largest weighting in the MSCI Canada Index had a solid month, bolstered by banks with U.S exposure that have preformed well post the U.S. election. Investors expect the incoming U.S. red wave to lead to decreased regulations in financials, propelling financial companies to grow at a faster clip than the previous administration.

Fixed Income

The month of November was pivotal for the fixed income markets. Early in the month, as the implications of the Presidential and Congressional elections were being digested, interest rates continued their climb higher, which had been continuous since the lows of September. Some of this was due to the Presidential outcome, but more of the move was likely due to the red wave which has given Republicans a slight majority in both Houses of Congress. The market clearly was not expecting this outcome, and it swiftly moved to reprice the likelihood of rising government debt and inflationary implications.

Rising interest rates plateaued mid-November, before declining swiftly after the announcement of Scott Bessent to lead the Treasury. Bessent is a solid pick, respected by market participants, with views that are not considered extremist. This appointment was key, perhaps the most important appointment that Trump had to make. As the uncertainties of the transition of power loomed, as well as the large current fiscal deficit and ever-growing government debt load, the next Treasury Secretary’s impact upon the markets (and the market’s impact upon the Government’s financing costs) were elevated to critical levels.

Having made a solid selection for this role allowed the rates market to take a breath. While most of the yield curve ended November higher than where it began 2024, it significantly backed off the recent highs that were experienced.

The Federal Reserve followed the election results with a 25-basis point reduction in the Federal Funds Target Rate. They are expected to make another 25-basis point cut in December, but are likely to take the opportunity to reset the outlook for significant rate reductions in 2025. As inflation has stopped falling, and even marginally increased, the case for significantly lower interest rates has become harder to make.

Bonds performed strongly in the month due to rising prices (driven by falling yields). In general, riskier bonds performed better than less risky bonds in November. This was driven by continued credit spread tightening, which pushes up bond prices. Tax-free Municipal bonds were the standout performer in November. This was driven by the decline in yields, combined with a richening of Munis compared to taxable bonds.

Alternative Investments

Alternative investments had mixed results in November. Broad commodities, as measured by the Bloomberg Commodity Index, were roughly flat on the month while the U.S. Dollar rose in reaction to President-elect Trump’s election victory. Commodity markets will try to digest the fallout of potentially more tariffs in the near future and their effect on global trade.

WTI Crude Oil fell -1.8% in November to close at $68 per barrel. Oil markets have been largely rangebound over the past couple of months while reacting to ongoing factors such as OPEC+ holding off on adding supply back to the market, weak China demand, and continued Middle East tensions.

The proposed Treasury Secretary pick, Scott Bessent, has laid out a deficit-reduction package that could affect oil markets over the next several years as well. Referred to as the 3-3-3 plan, he would like the U.S. to produce an additional 3 million barrels or equivalents a day (which may include natural gas in addition to oil). Some market observers are initially skeptical, as ramping up that much production could be difficult given that the U.S. already accounts for nearly 20% of global oil production. Also, oil and gas companies might not want to ramp up production given profitability concerns with oil prices at their current level. Additional supply would likely drive prices down even further, which could be beneficial for consumers but likely not popular with energy companies.