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Posted by Greg Taylor on Dec 4th, 2023

November to the Rescue

While not every investment strategy has worked as planned this year, one has done very well of late: seasonality.

Since the summer, equity markets have followed the seasonal pattern to a tee. After a quiet summer, volatility picked up in August, and markets fell under the stress of uncertainty through September and October. But just as market sentiment fell into extreme bearish levels, along came the seasonally strongest month of the year, November, to save the day.

November total return

Of course, just flipping the calendar wasn’t enough to change the results for thousands of companies and investors. It took a combination of better economic data and stronger earnings throughout the month, but it helped to support a change in the tone.

As we have learned over the past few years, as much as equity investors like to think they can set the pace, it’s really the bond market that is in charge. Once again, that happened as bond yields fell throughout the month, providing the relief equities needed to bounce. And what a bounce it was. For many markets, it was the best monthly return in years.

Using the US 10-year bond as a guide, yields hit cycle highs of 5% in October on fears the battle with inflation wasn’t done. Markets even began to price in future rate hikes as the FOMC would extend their hawkish positioning. However, through November, those expectations were completely reversed. Futures markets are no longer expecting rate hikes and have even begun to price in rate cuts in both Canada and the US by the second quarter of 2024. This expectation shift pushed the US 10-year bond yield down a remarkable 80 Bps to 4.2% at the end of the month.

The drop in yields helped nearly everything. Consumers struggling under the weight of higher housing and food costs may finally be able to get some relief, which contributed to a broadening out of the equity rally. For most of the year, the leadership of the equity market has been led by the mega-cap technology stocks fueled by AI enthusiasm. While those sectors once again had a strong move higher, one of the more positive developments for many investors was that this month’s move included many of the lagging groups, such as REITs, Banks, and Telecom companies.

It also must be stated that with the combined performance of both equity and fixed-income markets, November was the best month ever for the 60/40 balanced portfolio. This comes as a relief for many, as 2022 was the worst year ever for that strategy.

Of course, nothing ever goes in a straight line, and by no means has the ‘all clear’ been signalled as the economic data for the Canadian economy is now signalling that we are already in or near a recession. Central banks may be done hiking, but we need to make sure the damage from the rate increases isn’t too severe. We now enter the period where ‘bad news is bad’ and ‘good news is good.’

As we head into yearend and look forward to 2024, after such a strong year built on the optimism of a ‘soft-landing’ for the US economy, we must answer whether equity markets have gotten ahead of themselves. Did the gains observed in November include some pulled forward from next year? 

The seasonality for December remains strong, but there can be cases in which markets can stumble. We are starting to see some of the more beaten-up names bounce, as it seems they have run out of sellers. On the contrary, those who have been able to capture the gains for the year in the technology stocks may be hesitant to recognize those profits until the new year. December is shaping up for more muted returns than the last few months, which may be a welcome change for the holidays. But investors need not get too complacent as next year looks like a return to volatility.

— Greg Taylor, CFA, is the Chief Investment Officer of Purpose Investments

All data sourced from Bloomberg unless otherwise noted.

By the numbers displays total returns for the month of September 2023. The content of this document is for informational purposes only and is not being provided in the context of an offering of any securities described herein, nor is it a recommendation or solicitation to buy, hold or sell any security. The information is not investment advice, nor is it tailored to the needs or circumstances of any investor. Information contained in this document is not, and under no circumstances is it to be construed as, an offering memorandum, prospectus, advertisement or public offering of securities. No securities commission or similar regulatory authority has reviewed this document and any representation to the contrary is an offence. Information contained in this document is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice.

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Greg Taylor, CFA

Greg Taylor is the Chief Investment Officer of Purpose Investments. A data-driven manager with a focus on managing risk through active-trading strategies, Greg specializes in finding and exploiting pockets of volatility in the market to drive returns. He spent more than 15 years managing pension and mutual fund assets at Aurion Capital Management. He also held a role of senior portfolio manager at Front Street Capital and LOGiQ Asset Management before coming to Purpose Investments.

Greg serves on the investment committee for the MS Society of Canada and advises the finance program’s portfolio management course at Bishop’s University. He has won numerous Brendan Wood International “TopGun” awards and is a regular host and guest on BNN Bloomberg and Toronto’s all-news radio station, 680News. Greg is a CFA Charterholder and has a BBA in Finance from Bishop’s University.