What happened last week
A strong seasonal rally is in full swing as the S&P 500 posted its best month since July 2022.
The rally has been partially driven by increasing investor pricing of Fed cuts starting during the first half of next year.
More importantly, following a period of extreme volatility, interest rates continue to stabilize at levels more supportive of risk assets.
What we’re watching this week
November nonfarm payroll will be released and is expected to point to job gains; a miss on this release could reinforce recent trends favoring the YTD laggards.
Sentiment data releases out of the US and some growth and inflation data from Europe, China, and Japan fill out the economic calendar this week.
We are monitoring for tactical opportunities as YTD trends reverse.
Horizon’s Investment Management Views
Santa arrived early this year – the month of November spread the holiday cheer by delivering substantial gains across stocks and bonds. The S&P 500 had its best month since July 2022, while core bonds gained the most in the last 30 years. Other parts of the global equity universe that have lagged behind the “Magnificent 7” this year, including international markets, small caps, and financials, also participated in the November rally. With only a month left to go in 2023 and interest rates finally stabilizing, we think a broadening out of the equity rally can continue; our favorite expression of this theme is small caps, while we expect the quality/growth/AI trades to take a breather.
Last week, Governor Waller, an influential (and hawkish) Fed member who has been an excellent guide to policy this cycle, laid an important brick in the foundation for a durable, broad-based equity rally with his commentary on next year’s interest rate cuts. He greenlit lower Fed rates due to falling inflation to keep real (i.e., inflation-adjusted) policy from tightening further and putting too much pressure on the economy. Despite Powell’s pushback on market pricing of rate cuts, investors are growing increasingly confident that the Fed’s next move will be a cut in the first half of next year.
The rest of the world does not share the US’s exceptional economic tailwinds; however, forward-looking indicators for growth, such as last week’s PMI reports, continue to paint a somber picture for Europe and China. This week’s payrolls release, which is expected to show further gains in employment, does pose a risk to the US exceptionalism narrative. A softer jobs print will likely reinforce rate cut expectations and, thus, a softer dollar. If the dollar continues its recent weakening trend as interest rates fall, it may slightly improve the picture internationally, but we would caution against blindly embracing ALL of the laggard markets into 2024.
Disclosure
The commentary in this report is not a complete analysis of every material fact in respect to any company, industry or security. The opinions expressed here are not investment recommendations, but rather opinions that reflect the judgment of Horizon as of the date of the report and are subject to change without notice. Forward looking statements cannot be guaranteed. We do not intend and will not endeavor to provide notice if and when our opinions or actions change. This document does not constitute an offer to sell or a solicitation of an offer to buy any security or product and may not be relied upon in connection with the purchase or sale of any security or device. Before investing, an investor should consider his or her investment goals and risk comfort levels and consult with his or her investment adviser and tax professional. Equities are represented by the S&P 500 Index which is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. Small-cap stocks are represented by the S&P SmallCap 600 Index. It covers roughly the small-cap range of American stocks, using a capitalization-weighted index. The Magnificent Seven comprises Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla References to indices, or other measures of relative market performance over a specified period of time are provided for informational purposes only. Reference to an index does not imply that any account will achieve returns, volatility or other results similar to that index. The composition of an index may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject to change. It is not possible to invest directly in an index. This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Horizon Investments and the Horizon H are registered trademarks of Horizon Investments, LLC.
