It was a November to remember for stocks. The S&P 500 climbed almost 9%, delivering the 6th best November ever and the 7th best month for stocks in 30 years1. Volatility also fell over 30%, making the ride relatively smooth. The Bloomberg US Aggregate Bond Index also gained 4.5%, its best month since 1985 and 8th best return since inception of the index in 19761. Combine the two, and the famed 60% stock and 40% bond portfolio had its second-best month since 19912.
The rally wasn’t contained to just stocks and bonds, either. The table below shows that everything moved higher in November except crude oil (ironically, this could also be viewed as a positive outcome because it provided an additional boost to the rally).
It’s no surprise that the media is calling this the “everything rally,” but what fueled such a bullish month, and will it last?
It's often hard to know with any degree of certainty what moves markets in the short term. But when so many asset classes move together at once, the underlying driver is almost always expectations of the future direction of interest rates.
In late October, the market estimated a 40% chance the Fed would raise interest rates this month3. Today, it has changed its mind by pricing in a 99.7% chance the Fed does nothing at its next meeting in two weeks. It's even baked in a 61% chance of a rate cut by March and an 87% chance of at least one rate cut by May3.
Take those forecasts with a grain of salt because the market has an abysmal track record going out longer than a month or two. But it still shows what’s currently priced in and the impact of interest rate expectations on most asset prices.
Eddy Elfenbein is a professional money manager and writes a popular investing blog. He recently conducted a striking analysis showing how much markets love lower interest rates. He went back 18 months and separated the data into three buckets: days when the three-month Treasury yield fell, days when it increased, and days when it stayed flat.
On days when the yield increased, the S&P 500 fell at an annualized rate of 7.63%. When the yield was unchanged, so were stocks with a gain of 0.06%. But when the three-month yield fell, the S&P 500 rose at an annualized rate of 41.4%4.
Simply put, interest rates act as gravitational forces in financial markets. The lower they fall, the less pull they have on asset prices, making rallies like these possible.
The bottom line
It's hard to say if this “everything rally” will evolve into a “Santa Claus rally” to end the year, but one sign of encouragement is the amount of dry powder on the sidelines. The chart below shows that cash sitting in money market funds is at an all-time high5.
How could record cash be another tailwind? Let’s say an investor spooked out of stocks last year has been earning 5% in a money market fund with almost no risk. Relative to the last decade, when cash earned nothing, this 5% probably felt pretty good – for a while.
But the allure fades quickly as inflation and ordinary income taxes gobble up that 5% in the blink of an eye. Then, let’s say this same investor goes golfing one day with some friends and gets subjected to a five-hour brag session about how everyone else’s portfolios are up big this year. That 5% may not feel so great anymore, but don’t take my word for it. John Pierpoint Morgan, founder of J.P. Morgan, said it best:
“Nothing so undermines your financial judgment as the sight of your neighbor getting rich.”
The bottom line is that risky assets like nothing more than lower interest rates. Combine this with a cash pile so large that if it were denominated in $1 bills and laid flat in a line, it could reach Saturn6, and Santa may very well come early this year.
1 Bloomberg. As of 12/6/2023
5 Goldman Sachs Investment Research Division, Cormac Conners, as of 11/22/23.
6 One dollar bill is 6.14” long, so the total distance of $8.3 trillion is around 808 million miles. The average distance to Saturn from Earth is 886 million miles.
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