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Market Updates from RMR’s Investment Committee (November 2023)

| November 27, 2023

It Is All About the Federal Reserve

Powell’s September Comments 

Two months ago, Fed Chairman Powell, in his prepared comments after the Fed meeting stated, “interest rates will have to remain higher for longer”. The Fed was still unhappy with the rate of inflation persisting around 4% with the Fed target for inflation at 2%.

Those words “higher for longer” were met with the stock market giving back a large part of the yearly gains in 2023. The months of August, September and October were months of market declines and higher bond yields as gloom set in following his comments.    

Since the beginning of 2022, the Fed had raised rates seven times in 2022, along with an additional four times in 2023, trying to cool down the economy. The Fed Funds rate, in reaction to the Fed increases, shot up from 0.25% in March 2022 to 5.25% in July 2023. Both the stock and bond markets performed poorly during this period of rapid Fed increases. Holders of bonds witnessed the value of their bonds erode as higher bond yields made their bonds worth less if sold.

Powell’s November Comments 

The first week of November witnessed both the S&P 500 and Nasdaq notch their longest winning streaks since 2021, according to Barron’s. The S&P was positive for eight consecutive trading days while at the same time Treasury yields declined with the 10-year Treasury down to 4.57% as of November 8th after briefly touching 5% in October.  

Why the recent enthusiasm in the stock and bond markets? Fed Chairman Powell spoke in early November stating the Federal Reserve would leave interest rates alone, not raise rates, and signaled the Fed might be finished in hiking rates this cycle. This was great news for the stock market. Higher bond yields had become competition for stocks as investors received better returns without the risk of stock investing. With the 10-year Treasury yielding 4.9% and the S&P 500 dividend yield at 1.7%, the 3.2% differential had become compelling to investors needing income. Bond yields retreated on the news raising the value of existing bonds. 

Most recently on November 9th, Fed Chairman Powell spoke again, and added additional context from his remarks just the week before. He mentioned the Fed may not yet be done with rate increases as monetary policy may not be restrictive enough to bring inflation down to 2%. All decisions made would be data driven. The stock market immediately turned south, and bond yields climbed after his statement.

Washington as Usual 

Lawmakers are racing to produce a temporary extension to government spending before the November 17th deadline. That did not stop them though from leaving town on Thursday, not returning until Monday. On November 15th, the Senate voted to pass a continuing resolution funding the federal government through early 2024.

Bad News Can Be Good News 

Entrepreneur Magazine writes, in the sometimes-crazy world of stocks there are instances where “bad” economic news is “good” news for stocks. The first week of November the PMI (Purchase Managers’ Index) reported disappointing results. A decline in car buying weighed down production and consumers’ entertainment spending was impacted by higher credit card interest. 

Next, the U.S. Bureau of Labor Statistics reported the number of jobs added in October was lower than expected, implying the labor market may not be as strong as anticipated. 

Both reports were well received by the market as they imply weaker economic growth may make it easier for the Fed to control inflation without any further rate increases. 

Growth Versus Value Stocks  

Last year witnessed the first year since 2015 where value stocks outperformed growth stocks. Although both finished down for the year. According to Y Charts, the iShare S&P 500 Growth ETF was down 30.08% in 2022 versus the iShares S&P 500 Value ETF declining a more modest 7.38% 

This year, growth stocks reversed last year and have outperformed the return of value stocks. Y Charts reports that as of November 17th, growth stocks have returned 24.15%, blend stocks made up of growth and value have returned 19.13%, while value stocks rose a measly 13.35%.  

Outlook 

Goldman Sachs outlook for 2024: The global economy will fare better than expected. 

Mortgage rates will remain elevated to stay above 7%. Home prices will continue to increase. US home prices recently increased by 11%, according to the month-by-month annual growth of Case-Shiller National Index.   

Their growth outlook is based on prediction that rates hikes have already delivered the biggest hits to GDP growth, and manufacturing will recover. Central banks will have room to reduce interest rates if the economy slows.   

World GDP is forecast to expand 2.6% next year, compared to 2.1% forecast by economists for the U.S. China is expected to grow 4.8% and India at 6.3%. 

Health News 

There was a major announcement by the FDA in November approving Eli Lilly’s diabetes drug, Mounjaro, for weight-loss. The name for the weight-loss version is Zepbound. Patients in the study lost on average 18% of their total body weight!  The other diabetes/weight loss drugs recently approved by the FDA are Ozempic for diabetes and Wegovy, a higher dose version for weight loss. Both are drugs manufactured by Novo Nordisk. The drugs work by suppressing appetite.  

Goldman predicts the new class of drugs could grow more than 16 times to $100 billion, up from the $6 billion this year. Based on current trends, more than half the global population will be overweight or obese by 2035.   

Wide adoption of these drugs would reduce caloric intact of the population by 2 or 3 percent. Bad news for breakfast foods, weight loss bars and salad dressings.