Weekly Market Commentary

November 20, 2023

The Markets

Is it done? (We’re not talking about the turkey.)

Last week, investors enthusiastically embraced the idea that the Federal Reserve (Fed) could be done raising rates – and that it might even begin to lower them. As conviction about the possibility of rate cuts increased, stock and bond markets rallied, reported Koh Gui Qing and Dhara Ranasinghe of Reuters.

The catalyst was easing inflation.

Last week, the Consumer Price Index indicated that inflation in the United States was flat from September to October, and 3.2 percent for the preceding 12-month period. Core inflation, which excludes volatile food and energy prices, also slowed, up 0.2 percent month-to-month and 4 percent year-over-year.

The change in headline inflation was largely due to lower energy prices, which were down 2.5 percent in October and down 4.5 percent for the preceding 12-month period. In addition, the prices of gasoline and fuel oil dropped. The cost of shelter also grew more slowly – up 0.3 percent in October compared to up 0.6 percent in September – but it was 6.7 percent higher year-over-year.

There were other signs the U.S. economy may be softening, too. Earlier in the month, the October employment report saw the unemployment rate rise and hiring slow. Last week, the number of people filing unemployment claims increased more than expected, and continuing claims rose to the highest level since 2021, according to Angela Palumbo of Barron’s.

The market rallies lost some steam after Boston Fed President Susan Collins indicated she wasn’t yet ready to call the inflation fight by ruling out additional rate increases, reported Reuters. It was an important reminder. While a slower pace of overall price increases is great news, inflation remains well above the Fed’s two percent target.

Last week, major U.S. stock indices moved higher with the Standard & Poor’s 500 Index gaining 2.2 percent, the Dow Jones Industrial Average advancing 1.9 percent, and the Nasdaq Composite up 2.4 percent, according to Jacob Sonenshine of Barron’s. Treasury yields moved lower across all maturities.

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. 

Sources: Yahoo! Finance; MarketWatch; djindexes.com; U.S. Treasury; London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

WHAT IS THE LONG-TERM AVERAGE ANNUAL RETURN FOR U.S. STOCKS? Theodore Roosevelt is credited with saying, “The more you know about the past, the better prepared you are for the future.” That’s often true when it comes to investing. Investors who have a longer-term perspective on financial markets tend to be less likely to make impulsive decisions that are driven by short-term market volatility and could negatively affect longer-term performance.

Here’s an interesting piece of investment trivia from the Credit Suisse Global Investment Returns Yearbook 2023 (2023 Yearbook).

·        In 1899, the United Kingdom’s stock market was the largest in the world.* It comprised about 24 percent of world capitalization. The next largest markets were the United States (15 percent), Germany (13 percent), France (11 percent), Russia (6 percent), and Austria (5 percent).

·        By 2023, the United States boasted the world’s largest stock market with about 58 percent of world capitalization. The next largest markets were Japan (6 percent), the U.K. (4 percent), China (4 percent), France (3 percent), and Canada (3 percent).

Market data is valuable because it can help investors understand what has happened in the past and use the knowledge to set realistic expectations for the future. What is your estimate for the long-term average annual return of U.S. stocks?

The 2023 Yearbook provided us with the data. From 1900 through the end of 2022, the average annual return for U.S. stocks before inflation was 9.5 percent. After adjusting for inflation, U.S. stocks returned about 6.4 percent per year. The inflation-adjusted return for stocks outside the United States was 4.3 percent in U.S.-dollar terms.

Over the same period, from 1900 through 2022, U.S. bonds returned 4.7 percent per year before inflation, on average, and 1.7 percent per year after inflation, on average. Bills, which are very short-term investments, had an average annual return of 3.4 percent before inflation and 0.4 percent after inflation.

Over the long term, “[Stocks] were the best-performing asset class everywhere. Furthermore, bonds outperformed bills in every country except Portugal. This overall pattern, of [stocks] outperforming bonds and bonds beating bills, is what we would expect over the long haul since [stocks] are riskier than bonds, while bonds are riskier than cash,” reported Elroy Dimson, Paul Marsh and Mike Staunton who authored the 2023 Yearbook.

*Size was determined using the free-float market capitalizations of the countries in the FTSE All-World index.

Weekly Focus – Think About It

“Although it's easy to forget sometimes, a share is not a lottery ticket...it's part-ownership of a business.”

—Peter Lynch, asset manager