Stocks had another big month in what is shaping up to be a big year for investors, with the SPDR S&P 500 ETF Trust (NYSE: SPY) gaining another 3.8% in November.
With one month to go in the year, investors need to decide whether to cash out of their 2019 gains, with the market up more than 25%, or ride out the rally into the close of the year.
This week, DataTrek Research co-founder Nicholas Colas took a look back at six market takeaways from the month of November and discussed what last month's trading action could mean for returns through the end of the year.
US Equities Outperform
The S&P 500 is up more than 25% year-to-date, beating out both the MSCI EAFE Index, up 16%, and the MSCI Emerging Markets Index, which is up 10%.
Even though much of the November rally was due to U.S.-China trade deal optimism, Colas said U.S. stocks will likely continue to reap the lion’s share of the trade negotiation benefits.
Risk-On Trade Rules
The Technology (+3.9%) and Health Care (+4.7%) sectors were top performers in November, while Utilities (-1.7%) and Real Estate (-1.4%) lagged. Health care stocks may have gotten a boost in part due to Elizabeth Warren slumping in polls in November, Colas said.
Fixed Income Quiet
The lack of movement is a bit misleading given that 10-year Treasury yields rose from 1.73% to start the month to a peak of 1.95% before finishing at 1.77%, Colas said.
Yuan Outperforms Strong Dollar
In the currency market, relative strength in both the yuan and the U.S. dollar reflects optimism about a trade deal.
The yuan is not yet back above its previous peak at 7.0 per USD, but it is at least trending in the right direction heading into December, Colas said.
Investors No Longer Expect Rate Cuts
The odds of at least two more Fed interest rate cuts dropped from 13% to 10% in November, and the odds of another rate cut in the first half of 2020 dropped from 39% to 33%, according to CME Group.
Colas said investors seem to be increasingly confident that the Fed’s current policy is appropriate for now.
The CBOE VIX Index closed the month of November at its lowest level of the year. These new lows suggest investors are expecting the 2019 melt-up in stock prices to continue through December, Colas said.
In conclusion, he said U.S. stocks have bullish momentum heading into December — and it's unlikely anything will derail that train.
“At this point we have to wonder how much this Q4 rally is borrowing from 2020’s equity gains, but it seems clear that December will be dipping into that piggy bank as well.”
Stability and predictability are a recipe for economic growth. A stable interest rate environment and details on a potential trade deal would eliminate two of the largest uncertainties from the market, but it’s unclear just how much these two catalysts are already priced into the market following a big year of gains.
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