December 6, 2024

U.S. Equity markets had a stellar month in November. The S&P 500 Index advanced 5.9%, but the gold medal goes to small-cap stocks which registered a gain of 11.0%. November’s small-cap performance was the 4th best on record going back to 1926; and is consistent with a break of high-yield bond spreads well below 300 basis points from a “risk-on” viewpoint.  Of course, bears would remind the crowds that with this advance, valuations on a forward P/E basis are now 90th percentile or higher for small-, mid-, and large-cap stocks.  Within the S&P 500, discretionary (+13.3%) and financials (+10.3%) were the best performing sectors while health care (+0.3%) and materials (+1.6%) were the laggards.  With regard to style, growth outperformed value across all market-cap ranges. 

Macro data was more balanced over the past two weeks, including a steady job market, rising PMIs, better than expected personal income and spending growth, and firmer inflation; offset by continued weak manufacturing and housing activity and soft durable goods orders. This balanced position, along with falling gas prices and a rising stock market (wealth effect), sets the table for solid holiday sales. 

Solid economic growth, firmer inflation, loose financial conditions, suggests that the Fed must contemplate Trump policies and possibility of renewed “animal spirits” (note aforementioned small cap share price gains and high-yield bond spreads).  The Fed will need to tread carefully in our opinion, so it should not be surprising to see more cautious “Fed speak” re: timing/pace of rate cuts (Dec pause a possibility). 

The post-election stock market rally has driven investor sentiment back into “euphoric” territory as noted above; valuations and sentiment are elevated and an unpleasant surprise could cause another bout of market volatility, but frankly we do not see any reason for a near-term setback. We continue to believe a diversified portfolio of reasonably valued, high-quality durable growth stocks should allow ongoing participation in the current bull market while offering superior downside protection amidst any bouts of market volatility that may arise.