Bond and equity markets turn a corner – Damien’s Market Update – November 2023

5 min Read Published: 17 Nov 2023

Welcome to the latest episode of my monthly YouTube show where I discuss what is happening in investment markets and what to look out for. This episode I talk about how bond and equity markets may have turned a corner and what that means for the wider market.

Each show lasts between 5-10 minutes and is aimed at DIY investors (including novices) seeking contemporary analysis to help them understand how investment markets work.

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Abridged transcript - Damien's Market Update - November 2023

In my last update, titled “Uncertain times,” I explained how in the early part of October, global markets reacted to the unfolding events in Israel and Gaza. The initial "war trade" saw investors shifting towards safer assets - moving out of stocks, with the biggest beneficiaries being bonds, gold and cash (principally the US dollar). Gold rose above $2,000 per ounce with Friday afternoon rallies becoming commonplace as investors remained concerned as to what might unfold in the Middle East over the weekend. But as I mentioned last time, equity markets typically react negatively to the outbreak of conflicts, but often swiftly rebound. This time was no different. 

But as inflationary concerns and oil price hikes once again dominated investment headlines we saw a surge in bond yields and a retreat in stock markets. The VIX, often termed the market fear gauge, ascended to levels reminiscent of the March mini-banking crisis, encapsulating the market's nervousness. With earnings season well under way the focus turned to the large US tech companies which had been driving the wider US stock market higher throughout 2023 (and they were again among the strongest performers during October).The divergence between the S&P 500 and its equal-weighted counterpart so far this year highlights the outsized influence of these tech behemoths. However, as these giants wavered into the month-end, partly a result of some disappointing earnings reports, so did the market's confidence, with tech stocks beginning to prove a drag on the wider market rather than a driver.

As October came to a close, the market slump saw the S&P 500’s 10-month moving average indicator flash a warning signal on the last day of the month. It was the first time the sell signal had been triggered in almost a year. In the end major global stock markets finished October down between -2% and -3.76%. But as we moved into November the mood changed and we saw equity markets, particularly in the US, explode higher. So what was the catalyst?. For months now I’ve been highlighting how rising bond yields and the stronger US dollar have been a headwind for US equities, and ultimately stock markets globally. 

It is no coincidence that as bond yields imploded and the US dollar weakened aggressively a rocket was lit under the S&P 500, which has now broken above the 4500 level which equates to an almost 10% rally from the end of October low just above 4100. It means that the index has also recaptured the uptrend support line, which it lost in this October. An uptrend line that began back in October 2022. So why did treasury yields tumble? The stage for a potential turnaround in the bond market was actually set at the end of October when hedge fund manager Bill Ackman announced publicly on X (formerly twitter) that he had closed his high profile bet against the US treasury market, a bet which he’d also originally announced on X back in August. Ackman made over $200m on his latest bet as bond yields rose through September and October. In his tweet he claimed that “the economy is slowing faster than recent data suggests” and that "there is too much risk in the world to remain short bonds at current long-term rates.". 

Or in other words he believed bond yields had reached their peak and would begin to fall, meaning bond prices would rally. Such is his influence on investment markets that US treasury yields fell slightly on the news. But fast forward a week and the US Treasury announced that it would slow the pace of longer-dated debt issuance which sent yields even lower. In other words, the supply of new US treasuries will now be lower than previously expected which drove prices up and therefore yields down.  Additionally, new employment data in the US suggested that wage growth was slowing, leading investors to reassess their inflation expectations. The market began to price in the possibility that interest rates might have reached their peak in the US. This sentiment was reflected in a further rallying of treasuries, as yields tumbled in response to the changing economic outlook.

Then the cherry on the cake was lower than expected inflation, not just in the US but also the UK, which was announced in the last few days which accelerated the moves we’d already seen in the first half of November already. That meant bond yields went lower (so prices rallied) and the US dollar index fell. This is why the 10 year US treasury yield hit towards 4.4% while the US dollar index broke below 104. The euphoria in US stock markets and bond markets has bled over to other global equity markets. US tech stocks are naturally the biggest winners of lower rate expectations, with the Nasdaq 100 up almost 10% since the start of November. However, other markets have fared well too. The FTSE 100 is the laggard (hampered by its lack of tech exposure and the stronger pound versus the US dollar) but even it is up 2.26% so far this month. European stocks, as measured by the FTSE Eurofirst 300 are up 4.3% while Japanese equities are up 8.62% as measured by the Nikkei 225. Overall the MSCI AC World Index is up 6.17% so far in November.

Clearly investors are in a bullish mood, with the market narrative becoming that central banks have put the inflation genie back into the lamp and are now looking ahead to interest rate cuts in 2024. How quickly the narrative changed from the end of October. Investors should take that as a warning too. Investors are fickle and their narratives fleeting. But as hinted at in my video last month,  seasonality could provide a tailwind for stock markets. The 1st of November often marks the start of the strong six-month period for stocks, which is the driving force behind the Winter Portfolio that I produce for 80-20 Investor members each year. It’s also the time when smaller companies' stocks tend to outperform their larger counterparts. There is also of course the Santa Rally phenomenon too which I will talk about next time.

The reality is that positive seasonality or not, investors still have one eye on the situation in the Middle East, with the other firmly focused on economic data, bond yields, the US dollar as well as the outlook for central bank policies around the globe. But they are in bullish mood heading into the year end.