“Good investors gather information, put that information into current and historical context, then make sound decisions.”
Equity markets are experiencing a strong bounce in November after a moderate three month correction. That bounce literally came ‘out of nowhere’ after a sharp October decline that had major market indexes breaking support levels and moving averages. The S&P 500 Index fell by -10% in the course of that correction, effectively erasing all of the gains from April through July. The next support level was nearly -7% lower, close to prices last seen at the start of the year. It was clearly a critical decision time for institutional investors. The good news is that they rose to the occasion. The S&P 500 Index has risen +8.67% thus far in November alone.
With only a couple of days left, this November may break the record for the largest gain ever for the S&P 500 Index. The best November since 1950 was set just recently, in 2020, with a gain of +10.8%. In 1962 and 1980 there were gains of +10.2%. The average change since 1950 for the S&P 500 Index has been +1.7%, enough to rank it first of all the months of the year. November has also been the best month for the Russell 1000 and the Russell 2000 Indexes, and the second best month for the DJIA and the NASDAQ Indexes.
Seasonal strength is a very real factor to take into consideration when investing in equities. The months of November, December, and January are historically the three best performing contiguous months of the year. Seasonal cycles, political cycles, earnings cycles, and economic cycles all factor into equity performance. They all contribute to the technical analysis we utilize daily when evaluating financial market activity. And yet, with all of the technology that is at our fingertips we still get surprises along the way. Like this November!
Bond markets have also experienced exceptional returns in November. The Bloomberg US Aggregate Bond Index is up +3.96% MTD, the Bloomberg Municipal Bond Index is up +4.92% MTD, and the Bloomberg US Corporate High Yield Bond Index is up +3.69% MTD. Recent reports on the national economy, including reported inflation rates, have been favorable to the Federal Reserve’s mission. The possibility of future reductions in interest rates, after a period of stabilization, has sparked interest in a bond market revival. As a result, the volatile Bloomberg US Treasury 20+ Year Index has jumped +9.58% MTD!
In last month’s Commentary we specifically referenced the Volatility Index. The Volatility Index, also referred to as the VIX, is a measure of future stock market volatility. It is calculated from a formula based on S&P 500 index options and is the 30-day expected volatility of the S&P 500 Index. The higher the VIX, the higher the short-term expectations for volatility in the stock market. The lower the number, the lower the short-term expectations for volatility in the stock market. The catch is that volatility is often perceived and mislabeled as risk, which is the case for the VIX. After sitting as low as 12 during the Summer of 2023 equity market rally, the VIX started climbing in August, reversed in September back to 12, then shot back up over 20 in October. In November it dropped sharply back down to 12. The VIX isn’t a perfect indicator, but right now it is saying, ‘Green Light Go.’ December should be interesting.
The ‘Hit the brakes! Step on the gas!’ sequence can be difficult when managing financial assets. You can end up with portfolios that have elements of both an offensive and defensive posture. While this may seem reasonable, even prudent, the longer term net results can be disappointing because of the mutual cancellation of their respective benefits. Yet without them, you may end up with a very jerky ride! Appropriate asset allocation can provide an antidote and make the trip more comfortable over time. And therein lies the challenge, the goal, and the calling of the effective asset manager.
Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.
© 2023 Edward D. Foy. [email protected], www.foyfinancial.com.
Sources: StockCharts, Morningstar, Stock Trader’s Almanac.