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NOVEMBER 2023 MARKET INSIGHTS

By: ANTHONY MINOPOLI , PRESIDENT & CHIEF INVESTMENT OFFICER

This Market Insights is a few days late because I am just getting back into the swing of things after a trip to Rome last week in which I was asked to participate in a conference on Mensuram Bonam. This document, produced by the Pontifical Academy of Social Sciences, is a clarion call for Catholic investors, both institutions and individuals, to incorporate Catholic Social Teaching within their investment practices. Dr. John Grabowski, Ordinary Professor of Moral Theology/Ethics at The Catholic University of America, and the moral theologian for Knights of Columbus Asset Advisors, produced an excellent synopsis of this paper which can be found on our website. I was both a panel speaker and a round table leader and will be writing more on this topic in my blog.

October was certainly not a month for the meek and mild! The S&P 500 stood at 4,288 at the end of September and ended the month at 4,167, with a monthly high of 4,377 and a low of 4,117[1]. Overall, the index returned -2.1% for the month with dividends reinvested[1]. During this same period, the Bloomberg Aggregate Bond Index returned -1.58%[1]. We ended September with a yield of 4.57% on the 10-year Treasury and had a closing high of 4.99% on October 19th, before the 10-year yield settled in a 4.93% by the end of the month[1].

Domestically, inflation remains a critical factor for market participants. The most recent release of headline CPI indicated an annual inflation rate of 3.7%[1]. When we factor out food and energy, inflation is running at 4.1% on an annual basis[1]. The Personal Consumption Expenditure index, the Fed’s preferred inflation gauge, rose 3.4% on an annual basis[1]. All of these inflation measures are well below the 9.1% reading for headline inflation last June 2022. However, despite the drop in inflation, we are still a bit above the Fed’s goal of 2 to 2.5% annual inflation.

This column has touched upon employment and wages as two factors that have contributed to the current bout of inflation. The unemployment rate stood at 3.9% as of the last reading and underemployment was 7.2%[1]. Unemployment is 0.5% higher than the low of 3.4% that we saw this past January. Underemployment had a recent bottom of 6.5% in December 2022 and now stands 0.7% higher[1]. I read some recent research also indicating that the number of voluntary separations has declined rapidly and rather than the rapid job changes we saw coming out of COVID, employees are staying put in their current roles at an increasing rate. On the wage front, average hourly earnings increased by 0.3% to 4.4% on an annualized basis, which is down from the near-term peak of 7.8% in April 2020, although this was distorted by stimulus payments. For some perspective on wage growth, consider hourly earnings were rising 6.8% on an annual basis in January 2022, slowing to 5.4% by the end of 2022, and steadily declining at a slow rate throughout 2023[1].

If inflation is slowing and wage growth is also slowing, we may continue to see inflation stay on a downward trajectory. The Fed voted to keep the Fed Funds rate steady at their last meeting. I continue to take the Fed at their word that they are data dependent. We do not anticipate any type of cut at the December meeting, but based on how data comes through this month, we do not think it is wise to automatically assume that the Fed Funds rate will stay static in December.

Geopolitics remains a wildcard in the current economic environment. The war in Ukraine continues to drag on with both sides digging in for the long haul. In a certain sense, the longer the war goes on the more it may play to Russia’s strength. The citizens of many countries are growing wary of both the war and the continuing support needed for Ukraine to wage a defense and countermeasures against Russian forces. If this is carried out, some type of settled negotiation for territory may come to the fore.

The battles in Israel and Gaza also remain, although the fight is really in Gaza following the Palestinian incursion into Israel, which killed some 1,400 Israelis, most of whom were civilians, including women and children. While this has been going on, several militant groups have taken the opportunity to fire rockets at U.S. military installations in the Middle East. This morning (November 6, 2023) Secretary of State Blinken told those in the Middle East looking to go more on the offensive against our troops and installations that they should stop now and that we will protect ourselves. Within the region, we have placed a fully armed nuclear submarine as well as aircraft carriers and naval strike groups. I believe the thinking from our government is that a show of strength in the region will keep other nations from joining the fight.

One reasonable concern is that as well-armed as Hamas may be, Hezbollah is larger and even better-armed. We still operate under the assumption that this will remain a regional conflict and not escalate to a global conflict. However, it is important to recognize that while the probability of larger conflict is low, it is not zero. I will leave it to others to discuss the societal discourse of those Americans supporting the Palestinians. For the purposes of this column, it is important to understand that as election day is tomorrow, this conflict has drawn some real differences between and among parties and could have an impact on the outcomes of many races. I will soon pen a special blog post on the election and our participation at the Mensuram Bonam conference.

Until next month.

 

[1] Source: Bloomberg

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