rising and falling arrows going up and down

Market Commentary

Diamond Capital Management's Market Commentary

November 2023

Jeff C. Mantock, CFA, VP & Senior Research & Portfolio Manager, Diamond Capital Management

Executive Summary:

  • Weaker economic data in October increased speculation the Fed is done hiking rates.
  • A “not too hot, not too cold” economic backdrop could be bullish for equities. We believe near-term corporate profits and mega-cap valuations remain a concern.
  • The Fed seems prepared for a long pause, and this may signal the end of the bear market in bonds.

The stock market is off to a great start in November, and equity investors hope the rally will continue through year end. Before last week's rebound, the major indices posted three consecutive months of negative total returns, due primarily to uncertainty about the Federal Reserve's resolve to keep interest rates higher for longer and potentially hike them again. Odd as it may seem, investors were interpreting stronger-than-expected economic data as bad news to some degree because it might influence the Fed to maintain its tight monetary policy for too long and push the U.S. economy into recession.

However, weaker economic data in October has increased speculation the Fed is done hiking rates. U.S. payrolls slowed considerably, adding just 150,000 jobs, after having been revised downward from prior months, and both ISM Manufacturing and ISM Services declined sharply from September's report. Wage growth and unemployment, too, are signaling that the U.S. economy is slowing. While Q3 real GDP was up 4.9% from the same quarter a year ago, the Atlanta Fed's expectation for Q4/Q4 is a more moderate 1.2% annual rate.

A “not too hot, not too cold” backdrop could be bullish for equities, but we believe there are still downside risks related to Corporate America's profit outlook. Companies must contend with higher costs of capital, and this affects their ability to grow earnings, expand the business and repurchase shares. Large cap growth stocks solidly outperformed SMID and EM YTD, but the mega-cap companies that dominate the S&P 500 appear expensive from a valuation perspective.

Bond benchmarks are in danger of finishing a third straight year of negative returns, which would be unprecedented. Yet, the bear market in bonds may be coming to an end. The Fed seems prepared for a long pause, and U.S. Treasury yields have stabilized between 4.5% - 5.0%. If inflation proves to be less problematic, the Fed can resume a dual mandate—focusing on both inflation and full employment. The financial markets currently predict their next move will be a rate cut possibly as early as June 2024. Bonds could quickly reclaim their position in portfolios as a viable asset class that provides a source of income and reduces downside risk.

Bloomberg Barclays Bond Indices as of 11/04/2023. Bloomberg Sectors, Equity Indices, and Comm. & Currencies graph showing data as of 11/04/2023

This publication has been prepared by the staff of Diamond Capital Management for distribution to, among others, The National Bank of Indianapolis Wealth Management clients. Diamond Capital Management is a business group within The National Bank of Indianapolis that provides investment management services to customers of The National Bank of Indianapolis. The information and material contained herein is provided solely for general information purposes. This material is not intended to be investment advice nor is this information intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only current as of the stated date of their issue. Certain sections of this publication contain forward-looking statements that are based on the reasonable expectations, estimates, projections, and assumptions of the authors, but forward-looking statements are not guarantees of future performance and involve risks and uncertainties, which are difficult to predict. Investment ideas and strategies presented may not be suitable for all investors. No responsibility or liability is assumed by The National Bank of Indianapolis, its parent company, its subsidiaries, or its affiliates for any loss that may directly or indirectly result from use of information, commentary, or opinions in this publication by you or any other person. The content and any portion of this newsletter is for personal use only and may not be reprinted, sold, or redistributed without the written consent of The National Bank of Indianapolis.

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