by John Rothe | Investment Research
Monthly Market Summary
- The S&P 500 Index returned +5.6% during November, outperforming the Russell 2000 Index’s +2.2% return.
- Cyclical sectors outperformed during November, with Materials (+11.7%) and Industrials (+7.8%), the top two sectors. Energy (+1.3%) was the worst-performing sector as the price of oil declined -6.9%, followed by Consumer Discretionary (+1.5%), which was weighed down by Tesla’s underperformance.
- Corporate investment grade bonds generated a +6.6% total return, significantly outperforming corporate high-yield bonds’ +3.4% total return.
- The MSCI EAFE Index of global developed market stocks returned +13.2%, underperforming the MSCI Emerging Market Index’s +15.6% return.
Stocks & Bonds Trade Higher After Encouraging October Inflation Report
Stocks traded higher for a second consecutive month after another encouraging inflation report. Data showed the Consumer Price Index (CPI), which measures inflation, increased +0.4% month-over-month during October. While October’s +0.4% reading was a repeat of September’s +0.4%, it was below the market’s +0.6% estimate. Compared to October 2021, the CPI increased by +7.8% year-over-year.
It was the slowest annual pace of inflation since January 2022 and the fourth consecutive month that the pace of inflation slowed from the prior month. Investors cheered the report as fresh evidence that price pressures are easing after a period of high inflation.
The top story in the bond market was falling Treasury yields as investors wagered that a drop in inflation will allow the Federal Reserve to slow its interest rate hikes. Bonds traded higher as interest rates declined, and the U.S. Bond Aggregate generated a +3.8% total return.
The equity market also traded higher, and the S&P 500 followed up October’s +8.1% rally with another +3.6% gain during November. International stocks joined in on the rally and significantly outperformed U.S. equities as the U.S. dollar weakened. Overall, November was a strong month across asset classes.
Market Internals Highlight Broad Participation During November
A look beyond the S&P 500’s headline return reveals strong market breadth. Breadth measures underlying strength or weakness based on the number of stocks advancing or declining and can be used to analyze market trends. A rising index with strong breadth indicates a large group of stocks participated in the index’s rise, while weak breadth indicates fewer stocks participated.
During November, eight out of the eleven S&P 500 sectors outperformed the broad S&P 500 index.
In addition, 425 of the S&P 500’s 503 constituents traded higher during November. This data suggests investors are becoming more confident in the path forward. While it is encouraging to see such broad participation, markets will ultimately be looking for incoming economic data to support the latest rally.
by John Rothe | Economic Research
This month’s charts examine the trend of increasing consumer credit usage. Figure 1 charts the amount of outstanding revolving consumer credit, and Figure 2 charts the year-over-year percentage growth of revolving credit. Revolving credit, such as a credit card, allows the account holder to borrow money repeatedly up to a set credit limit while making monthly payments. The charts show credit usage initially decreased during the pandemic as consumers used government stimulus checks and savings from fewer discretionary purchases to pay down debt.
After declining during the pandemic, data shows consumer credit usage is rising again and now back above pre-pandemic levels. The increase in credit usage started during 2021 as the effect of stimulus checks faded and the economic reopening released a wave of pent-up demand. Credit usage continues to increase during 2022 as inflation increases the price of everyday necessities, such as gas, groceries, and housing.
The increase in consumer credit usage raises an important point. Credit cards are an easy and common way to borrow money, but they are also one of the most expensive forms of borrowing. Most credit cards charge a variable interest rate tied to the prime rate, which is linked to the federal funds rate.
This year’s interest rate increases by the Federal Reserve are intended to ease inflation pressures, but they also make carrying a credit card balance more expensive. An increase in the federal funds rate increases the prime rate, which in turn increases the interest rate charged on credit cards. According to a recent survey by Bankrate.com, the average credit card interest rate reached 17.96% at the end of August, which marks the highest level since 1996.
The increase in mortgage and auto loan rates is getting all the attention this year, but the increase in credit card interest rates is more impactful to everyday life. Credit cards are a valuable tool to manage your personal finances, such as building up a credit score, increasing your purchasing power, and earning rewards. However, credit cards can also create negative issues, such as overspending, high balances, and high interest expenses, when misused and mismanaged.
by John Rothe | Investment Research
Historical lookback of returns during the month of September. 1950 to 2022(as of 9/12/2022)
by John Rothe | Investment Research
One of the more “sticky” myths in the stock market is that of staying fully invested so you don’t miss the best days.
Charts like this are common among fans of buy and hold strategies:
However, what charts like this fail to mention is that the best days often follow the worst days.
There are some powerful arguments that missing BOTH the best and worst days can be beneficial:
How can an investor miss both the best and the worst days?
Applying a 200-day moving average as a signal to exit the market has worked surprisingly well.
The majority of the best and worst days occur when the stock market is trading below its 200-day moving average.
Below is the Dow Jones Index going back to January 1, 1929. The red arrows represent the 10 worst days and the green arrows are the 10 best days.
The orange vertical lines are the times when one of these 10 best/worst days occurred ABOVE the 200-day moving average:
16 out of 20 days occurred below the 200-day moving average. All occurring in the 1930s
If we move ahead to a more “modern” time and use the 1940s as a starting point, 19 out of 20 best and worst days occur below the 200-day moving average:
For investors looking for a way to better manage risk in their portfolio, using a 200-day moving average as an exit signal may add a layer of protection and allow them to sleep better at night.
