We hope everyone had a wonderful Thanksgiving holiday.
While we can all recognize it has been a tough year for equities and fixed income, I am pleased to announce that November 2022 was the first month this year where all of the indexes we show in this piece generated positive returns. Driving returns all year has been stubbornly high inflation and the subsequent pace of interest rate hikes the Fed has initiated in order to drive inflation down. In recent weeks, markets have rallied with the hopes that the rate of Fed increases will slow and they will eventually pause, which was somewhat validated by the reason comments by Chairman Powell when he said "the time for moderating the pace of rate increases may come as soon as the December meeting". The concepts of Fed pace (the rate of increases), pause (stopping increases for a period to see the impact of previous increases), and pivot (the Fed lowering rates) will be concepts we discuss more in our quarterly collateral, coming in January.
- The MSCI ACWI rose 7.8% for the month, driven by MSCI Emerging Markets (14.8%), MSCI EAFE (11.3%) and MSCI EAFE Small Cap (9.9%).
- While a strong dollar has been the story for most of the year, a declining dollar was partially responsible for the increase in non-US equity returns during November. For example, while the MSCI EAFE increase 11.3% is USD terms, it's gain was only 6.4% in local currency terms.
- The highest returning US index shown was the R1000V, gaining 6.2% for the month.
- To show how index construction can make a difference in results, the R2000V has declined -8.5% YTD while the S&P 600 Value has only declined -4.8% YTD. We believe a good portion of this difference is due to how S&P indexes have a screen for positive earnings, whereas the Russell indexes do not. And while this is an index return comparison, we thought it might be helpful for those advisors that hold DFA Small Cap Value or Avantis Small Cap Value products to know that their YTD returns are actually positive (2.5% and 2.2% respectively) as they target profitability even more specifically (and their exclusion of REITs has also benefited them over the YTD time period).
- While we recognize 2022 has been painful for equity investors, taking a quick scan of the other columns reminds us that investors that have stuck with it over the years have still earned handsome returns in most cases (e.g. the S&P 500 3 yr return is still 10.9%, its 5 yr return is 11% and its 10 yr return is 13.3%).
In fixed income:
- A Wall Street Journal article from 11/30/22 (subscription required) noted that recent yields on the 10 yr Treasury dropped to 78 bps below that of the 2 yr Treasury, the largest negative gap (i.e. inversion) since late 1981. As a reminder, while inverted yield curves are correlated with recessions, they do not cause recessions.
- Across short, intermediate and long maturity buckets, Corporates outperformed their Treasury counterparts in November. In addition, as Treasury yields from 1 yr and longer fell during November, the longer maturity bonds performed better vs. the shorter counterparts.
- Munis continue to be solid relative performers, a theme we have seen all year compared to their Treasury and Corporate counterparts.
As always, please let us know if you have any questions. We hope everyone has a happy and healthy holiday season!