Signs of peaking inflation and the potential for central bank moderation in 2023 pushed equity markets higher in November.
Key Observations
- Risk assets rallied on the back of softening inflation data and “Fed pause” mentality
- The Federal Reserve reiterated its commitment to combat inflation, but a pivoting tone hinted at the potential for a slowing pace of hikes in 2023
- Emerging market equities, led by China, were a standout for the month
- The U.S. yield curve remains inverted at levels not seen since the early ‘80s, historically signaling a recession, but the timing of the start and magnitude vary widely
Market Recap
Risk assets extended the October rally into November, continuing to claw back returns from lows earlier in the year. Investor sentiment swung 180 degrees as economic data showed signs of peaking inflation and the resulting potential for a slowing pace of Federal Reserve (“Fed”) rate hikes heading into 2023. Fears of a recession that spooked markets earlier in the year have either moderated or been accepted by investors and, despite economic activity starting to trend down, markets remained resilient. U.S. equity markets generally saw mid-single digit returns, driven by larger cap companies, while small cap stocks, as measured by the Russell 2000 index, posted a modest positive return. Non-U.S. equities rose in the month and widely outpaced their domestic counterparts. A new prime minister in the U.K. and clarity on reforms, as well as favorable inflation prints in Germany and Spain, likely helped push international developed markets (MSCI EAFE Index) higher. The U.S. dollar weakened compared to many major currencies, providing an additional tailwind for international stocks. Emerging market equities (MSCI EM Index) also saw double digit gains in the month. China remained in the headlines; positive sentiment about the potential for easing restrictions on the zero-COVID policy overshadowed protests later in the month. MSCI China returned 29.7 percent in November.
