Market Commentary: Market Recap
Market Update for the Month Ending November 30, 2013
U.S. markets continue up
November was another very strong month for U.S. stock markets. The Dow Jones Industrial Average was up 3.82 percent, while the S&P 500 and Nasdaq Composite indices returned 3.05 percent and 3.58 percent, respectively. Gains were broad based, with growth slightly outperforming value and small stocks outperforming large ones. The only domestic equity asset class showing an actual decline was real estate investment trusts (REITs), due to its exposure to interest rates (see chart).
Figure 1. REITs Underperformed U.S. Stocks in November
Technical factors remained supportive, with all indices well above their 50- and 200-day moving averages. Fundamentals also showed no major change in trend, as earnings beat expectations overall for the quarter. Valuation levels moved higher, though, suggesting that prices may be subject to risk.
International market returns were more muted. The MSCI EAFE Index gained 0.77 percent in November, while the MSCI Emerging Markets Index posted a 1.56-percent loss.
Interest rates rose during the month, with the benchmark 10-year Treasury bond increasing from 2.57 percent to 2.75 percent. The rise drove the previously mentioned decline in the MSCI U.S. REIT Index and sent the Barclays Capital Aggregate Bond Index down 0.37 percent. Treasuries and mortgage-backed securities were losers for the month, while high-yield and bank loans posted modest gains.
Domestic economy still improving
Continuing positive economic news drove the rise in rates and strong U.S. equity performance. Gross domestic product for the third quarter grew 2.8 percent, much higher than expected.
The ISM Manufacturing survey reached a two-and-a-half-year high at the start of November, due to increased business activity, including hiring. Private payrolls increased a surprising 212,000, up from 150,000 in October. The jobs situation was also bolstered by higher pay, as the wage growth rate ticked up to 2.2 percent on an annual basis, and personal income increased a substantial 0.5 percent relative to the previous month. Higher incomes supported better retail sales, which increased 0.4 percent in October, a strong gain.
Janet Yellen nominated as new Fed chairperson
Janet Yellen was nominated to succeed Ben Bernanke as Fed chairperson. Financial markets interpreted this as a positive development because Yellen is widely perceived as a “dove” who will likely continue the existing supportive policies.
International economic prospects look better
Europe and China displayed economic progress during the month. European growth was led by strong improvements in the United Kingdom and Germany, but even peripheral markets showed improvement. Ireland and Spain were set to exit their financial support programs, and Greece showed signs of a primary surplus, which caused Moody’s to raise the nation’s credit rating two steps. An outlier was France, which continued to struggle.
China’s leaders outlined their plans for the years leading up to 2020. A number of market-friendly reforms were discussed at the country’s Third Plenum, including deregulation of areas of the economy dominated by state-owned enterprises, financial liberalization via abolition of certificate of deposit rate ceilings, and plans to give equal rights to foreign and domestic equity investors.
Markets bright, but clouds ahead
The strong performance of U.S. equity markets in November is encouraging, but worries remain. The first is the relatively high level of stock valuations, based largely on expectations of continued Fed support. Another concern is the durability of the global recovery. Weaker stock market performance abroad suggests that investors around the world are less optimistic than they are here.
Cautious optimism remains the appropriate stance. 2013 has been a very strong year for the market, but a pullback at some point is inevitable. Investors should maintain a disciplined program and treat the good times as calmly as they treat the bad.
Disclosure: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The MSCI U.S. REIT Index broadly and fairly represents the equity REIT opportunity set with proper investability screens to ensure that the index is investable and replicable. The index represents approximately 85 percent of the U.S. REIT universe. The Barclays Capital Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Barclays Capital government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities.