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From Independent Women
What a difference a few days can make for equity investments.
When we started writing this newsletter at the beginning of this month, the picture for equities was challenging: the news of further geopolitical instability and continuing high interest rates on high national debt levels weighed on financial markets, resulting in a downswing in values, and challenging investors’ nerves once again.
It is worth observing that, historically, September and October are the worst months of the year for stocks, so a market correction at this time of year proved predictable (to an extent). Regardless of the view we hold, it was likely that this was the worst this year has to offer. Our focus was fixed on the remainder of 2023, and whether a rally could be anticipated before the end of the year.
Taking a leap into November, the situation has reversed and as I write to you, presents a much more positive view:
“Last week was one of the best on recent record for both stock and bonds. The S&P 500 gained nearly 6%, erasing more than half of its correction (-11%), while the US 10y Treasury gained 2% and the 30y gained 4%, now trading at 4.6% and 4.7% respectively. The ostensible catalyst was the Fed’s second-in-a-row rate pause, accompanied by a commentary which led markets to believe that the US central bank is done with rate hikes for this cycle –and that we could possibly see rate cuts at some point mid-next year.“
A slightly-below-expectations labour market number on Friday helped further fuel those hopes.
Additionally, bond futures had a lot of short positions, which allowed for a short squeeze (traders giving up on their bets against bonds).
However, the last week of October is also the last week of trading in the financial year for Hedge Funds and other investment vehicles. As such, many move to crystallise losses. Following November 1st, managers wipe the slate and are free to trade again.
Unlike the real Santa, who brings his gifts late in the year, the Financial Santa, tends to begin a couple of months earlier. Historically, this has been very well documented. In the last 52 years, for the S&P 500:• 75% of returns after Nov 1st and until the end of the year have been positive. • When returns are positive, the last two months count for more than 30% of annual returns for the index on average. • 29% of the time, the last two months have had better performance than the previous ten months cumulatively • Results are less clear in other markets, which may correlate with the S&P but don’t have the same fiscal yearIn an age where robots run trading, it stands to reason that past trends would tend to be reinforced. Thus, the combination of a rate pause confirmation along with a fiscal year-end for funds and short positioning catalysed a broad-based asset rally.
News from the US prevails on many investors’ portfolios for several reasons, but particularly as the nature of a diversified portfolio requires a range of global stocks. We are spending a lot of time this year analysing US activity as it has broad spectrum relevance for British investors, although no less than home grown conditions, of which there are plenty.
Taking a look closer to home, the situation is not substantially different to the observations about the US. Inflation is reducing, although very slowly, and it is unlikely that we’ll see a return to the magical target level of 2% for some time; the Bank of England has held interest rates for another quarter at its current level of 5.25%; and the economy continues to (narrowly) avoid recession. Although these are lukewarm improvements, market sentiment remains uncharacteristically high, despite continued volatility as mentioned. Investors who reflected on their portfolio values a couple of weeks ago could not have picked a more unfortunate time, coinciding with a trough, and may feel more encouraged by the corresponding bounce.
After the recent rally, there could be further momentum in store before the year is out, but we remain in a highly fluid time of global events.
Our next focus is keeping an eye on if, and when, rate cuts may occur.