A November to remember

November lived up to its reputation as a very good month for investors.

World shares were up 9.3 per cent, the best return in three years. The S&P 500 in the US rallied 8.9 per cent and the local NZX 50 posted an impressive 5.3 per cent increase, the biggest monthly gains for both indices since July 2022.

It wasn’t just shares that had a great month, with conservative assets getting in on the action too.

US bonds had their best month since 1985 (with a 4.5 per cent rise), while the NZX Investment Grade Corporate Bond Index posted a 2.7 per cent increase, the strongest since the index came into being in 2001.

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There are a few reasons for such a lucrative period, one of which could simply be the timing.

Global sharemarkets fell sharply in the previous three months, with the US and New Zealand markets down more than ten per cent between the end of July and late October.

This coincided with interest rates hitting multi-year highs, which meant bonds and fixed income also performed poorly.

The US 10-year Treasury yield rose to a 16-year high during October, while New Zealand wholesale interest rates hit their highest level since 2010.

That set the scene for a rebound in November, historically the strongest month of the year for US shares.

All that was needed was some friendly economic data, and we got that as several indicators validated the notion of an elusive “soft landing” in the US.

That’s when a central bank tames inflation, without the economy tanking or unemployment rising sharply.

The US isn’t out of the woods, but right now it’s a case of so far so good.

We saw further progress on inflation during November, with the Federal Reserve’s preferred pricing gauge falling further.

The annual pace of core PCE inflation slowed to 3.5 per cent, the lowest since April 2021.

The most recent Fed forecasts had this falling to 3.7 per cent by the end of this year, so the central bank is ahead of schedule.

Even though 3.5 per cent is still too high, if we annualise the average of the last three months core PCE inflation is running at about 2.5 per cent.

That’s getting close to the Fed’s target, and it supports the view that policy rates have peaked and the next move will be down.

Lower gasoline prices have also helped sentiment, with these declines coming on the back of falling oil prices.

Oil slumped 6.2 per cent during November, finishing at a five-month low almost 20 per cent below its September highs.

One would’ve expected a slowdown in inflation to go hand in hand with a weaker economy, but the US has remained resilient.

September quarter gross domestic product (GDP) was revised higher late last month, showing the world’s biggest economy grew at an annualised rate of 5.2 per cent last quarter.

The backdrop isn’t quite as strong as that here in New Zealand, although we’ve exceeded expectations too. Many people would’ve expected us to have fallen into recession by now, but we haven’t.

We’ve got some challenges, although inflation has slowed more quickly than expected, business confidence has rebounded to an eight-year high and the labour market is showing signs of easing.

The next hurdle for global markets to clear will be the final Fed meeting of the year, which takes place next week and will include an updated set of projections.

A day ahead of that, a fresh batch of US inflation figures are due.

We’ll then be looking ahead to the quarterly reporting season in mid-January.

This will see all the international heavyweights release their latest earnings reports, allowing us to gauge whether profitability and margins remain good enough to justify the rally we’ve seen.

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