Market Review – November 2023

All figures mentioned in this article are total return and quoted with GBP as the base currency, and are accurate as at time of writing.

Please note, the value of your investment can go down as well as up so you might not get back the amount you put in. Past performance is not a guide to future performance. The views expressed here should not be taken as recommendation, advice or forecast. We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.

Artificial Intelligence continues to thrive 

There were positive results from the third-quarter companies' earnings season, with some successes from technology companies seeking to profit from artificial intelligence (AI). Most companies in the S&P 500 Index beat earnings and revenue expectations, according to FactSet. 

The group of US mega-cap tech stocks, the “Magnificent 7” (companies with a capitalisation or market value of over $200 billion) that have led most of the US stockmarket gains this year, had mixed results. Nvidia reported impressive record-breaking revenues of $18 billion (up 206% from a year ago). On the other hand, Tesla failed to exceed revenue expectations. As such, stockmarket reaction to the “Magnificent 7’s” Quarter 3 earnings results has been varied. 

There’s uncertainty about how the macroeconomic backdrop will affect earnings in 2024. Small-cap stocks (companies that have a market value of about $250 million to $2 billion) are currently cheap vs large-cap stocks (companies that have a market value of $10 billion or more), and we think the trend of companies moving more of their production to the US will help smaller companies.  

Investors anticipate the end of the rate hiking cycle in the US  

In November, the US Federal Reserve (the Fed) held interest rates unchanged at 5.25% - 5.50%. Jerome Powell, the Fed Chair, said the full effect of increases to interest rates hadn’t been reflected in the economy just yet. The weaker economic data from the US made the market consensus shift towards thinking there won’t be further interest rate increases. 

In October, the US Consumer Price Index (CPI) increased 3.2% year-on-year (vs 3.7% in September), which was below expectations. The Institute of Supply Managers’ survey of manufacturers, which is an indicator of economic activity, was weaker than expected. 

In the US, the unemployment rate increased to 3.9% (October) and initial jobless claims increased more than expected in the second full week of November. Walmart’s earnings, which are often used as a measure of the state of the economy, were strong. However, the company forecast lower full-year earnings which raised some concerns.  

US bond yields fell, amidst greater anticipation that the Fed would reduce interest rates. However, over the past few months, overall government bond yields have risen sharply. The US 10-year government bond yield increased more than 1% this year between May to October. In our view, bonds have become more attractive. The interest you could potentially get from bonds has become closer to the returns you could see from historically ‘riskier’ equities. 

Energy stocks weigh down UK stocks 

In November, the UK stock market underperformed vs world stocks. The UK stock market has a large concentration of energy stocks, and has been impacted by the volatility of oil price, due to concerns about global energy supplies.  

The economic data from the UK had some positive surprises in November. In October, inflation was down to 4.6% year-on-year (vs 6.7% in September). Business activity surveys for manufacturing and services were better than expected. However, the labour market remained stagnant, with the number of job vacancies still exceeding the pre-pandemic levels and wage growth not slowing in line with expectations. This added to investors’ concerns about whether interest rates may increase in the future.  

Jeremy Hunt, the Chancellor of the Exchequer, delivered his Autumn statement in November, setting out the economic priorities to “halve inflation, grow the economy and reduce debt”. The key policy highlights were welfare reform, tax cuts, and an increase to the national living wage from April 2024, from £10.42 per hour to £11.44 per hour. Gilts yields increased, following the news that the government borrowed more money than expected in October.

European Central Bank say it's too early to declare victory over inflation 

There has been some conflicting economic stories coming from Europe. Whilst some business surveys continued to show contraction, in October, there was a small rebound in bank lending to the private sector. Eurozone inflation fell more than expected to 2.4% year-on-year in November (vs 2.9% reported in October). Reductions in energy and food helped the decline. Investors think rates will be cut in 2024, but the President of the European Central Bank (ECB), Christine Lagarde, stated that it’s too early to declare victory over inflation.

The US economy remains resilient, despite the weaker economic data coming from the US in November. Our view is that interest rates will stay at current levels, given that inflation remains above the 2% target in the US, UK and Europe. We think that UK and US government bonds pay attractive interest rates.