November 2022 Market Recap: The S&P 500 bounce in November (+5.4%) occurred as the US yield curve inverted further as the 10 year treasury yields rallied. This is the second straight month of strong gains, as October returned +8.1%. It feels as if the market is focusing on stronger-than-expected earnings growth and the potential for a Fed pivot. Markets this year continue to be driven by yields, as we saw both stocks and bonds up during the month, as the 10YR Treasury saw some reprieve. Given the year-to-date returns, we were somewhat surprised by the amount of equity inflows to the market during the month of +$20B.
Jerome Powell’s Press Conference Notes: The most important thing to keep in mind is that Powell did not say anything new at the Brookings Conference, yet markets rallied due to the three following sentences:
“The time for moderating the pace of rate increases may come as soon as the December meeting.”
Great, but everybody knew this ever since vice chair Brainard hinted at it almost two months ago. It was also nearly perfectly priced by futures markets.
“It seems to me likely that the ultimate level of rates will need to be somewhat higher than thought at the time of the September meeting.”
This is not dovish, obviously, but it was also completely known as Powell said the same thing at the last press conference.
“It is likely that restoring price stability will require holding policy at a restrictive level for some time.”
This was also well known before as Powell, Brainard, and others expressed the same concept before. In Fed-speak “some time” indicates a period of time of intentionally vague but not short length and it’s fair to infer that the Fed does not envision rate cuts next year.
Recent GDP Readings: After two consecutive quarters of decline, US GDP rebounded sharply at an annualized 2.9% in the third quarter, but the snapback resulted from a dramatic swing in trade, inventories, and government spending. Indeed, trade boosted GDP growth by 2.8%, reflecting strong exports – which was a weakness in the previous reports. GDP excluding inventories, trade, and government spending has steadily lost steam since the start of this year, coming in at just 0.08% in Q3. This shows that the nominal economy remains strong
No Help from Bond Markets: The year-to-date pain in the bond markets was not apparent in November, with the U.S. Aggregate Index still down almost 12.6% year-to-date. Since the late 1970s, no other year has come close to experiencing similar pain in the bond market. U.S. bonds are now 17.8% off their peak in July ‘20. Except for the drawdown that ended in February 1980 (when the index was only calculated monthly), this is almost twice as large as the next biggest drawdown on record.
Where is The Fed Put? We continue to believe that the Fed Put is much lower right now, as FOMC Chairman Jerome Powell, has stated that the Fed is going to keep raising until we have a recession unless inflation meaningfully improves. The cause of the decline is equally important. The Fed has a long history of easing policy in response to earnings drops, but there isn’t much evidence that it responds to multiple compression. The fact that inflation is higher than at any time since the genesis of the Fed Put and that stocks have appreciated a lot over the past two years suggest the strike is well below current prices. Similarly, the recent decline in stock prices owes exclusively to lower multiples; it would take another leg down induced by a drop in earnings to impress the Fed.
“Phantom Earnings” Moving Forward: Earnings likely to play an increasingly bigger role from a directional standpoint as the market transitioned from inflation to growth frustration. We believe that consensus estimates still need to come down to reflect a softening macro backdrop and inflation/margin pressures. We remain skeptics that the current 2023 earnings expectations for the S&P 500 remain too high. On average, earnings, as a whole, tend to fall between 15% – 20%, of which, earnings are 8.7% off their highs.
S&P Valuation: The S&P 500 valuation increased over the month, as the market had a strong month, coupled with earnings expectations falling 1.7% since 10/31. The market trades at 18.2x (17.2x last month).
Earnings – 2022 S&P 500 operating earnings = $221 (+8.3%). 2023 = $231 (+4.5%). 2021 = $204. 2020 = $136. 2019 = $161. *
Valuations: S&P 500 Fwd. P/E: 18.2x, EAFE: 12.1x, EM: 11.0x, R1V: 14.4x, R1G: 24.0x, and R2K: 12.4x. *
*Source: Bloomberg and FactSet, Data as of 11/30/22
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The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 11.2 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 4.6 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
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