November 2023 - Market Update

Data Dashboard

Stock Market

The US stock market had one of its best months in recent history, recovering over 9% in aggregate. Tech and Real Estate stocks led the way, while the Energy sector lagged.

Small and Mid-cap stocks also performed well in November, bringing their YTD performance positive. The Equal-weight S&P 500 index also performed well, returning over 9% and bringing the 2023 return to 6.44%. This consistent positive movement across different US stock market indexes is encouraging compared to other periods where returns were so disparate.

Looking at the valuations in the US stock market, ratios are moderate to slightly high compared to the long-term average. The forward P/E on the S&P 500 is around 19x, and consensus is for a 6.5% growth in earnings over the next year.

November Monthly Returns (by US Sector)

Bond Market

The Aggregate Bond Market index rallied 4.6% in November due to the decline in intermediate-term yields. Bonds are still down double digits from their peak, and many investors are looking to short-term bonds for higher yields. The yield curve indicates that short-term yields will decline in mid-2024, which will depend largely on the path of inflation and the Fed’s policy shifts.

Spreads on High Yield Corporate bonds (the extra yield you earn for taking on the credit risk of lower quality companies) declined dramatically in November (4.37% to 3.70%). Corporate bond spreads are an indicator of the market’s perception of future default risk. Higher spreads occur when a weaker economy is expected to cause stress to companies in a weak financial condition. The decline in spreads in November shows that investors are more confident that weaker companies are not facing a significant risk in this current environment.

Economics

The economy is slowing moderately, which is the best outcome we could expect given the current Fed policy designed to reduce the pace of inflation. Higher interest rates generally cause businesses and consumers to tighten their belts, which reduces the upward pressure on prices in the economy. Since the Fed started increasing rates from near-zero to over 5%, unemployment has remained below 4% and consumer spending has achieved a steady pace. If this continues, the Fed may have pulled off the near-impossible.

Heading into 2024, it is expected that the economy will continue to slow, and possibly contract slightly. Unemployment may still need to rise in order to get inflation below an acceptable level. Economist will be watching consumer spending in December as a test of the consumer’s confidence in their job security heading into the new year, and how much companies are willing to eat into margins to clear inventory. At this point, we are optimistic about the state of the US economy.

November Economic Dashboard

Tactical Trades

For our Tactical Equity Stocks, we remain overweight in Technology and Financials, and underweight Industrials and Utilities. As for Tactical Equity ETF portfolios, we increased exposure to tech and foreign stocks.

For our Tactical Fixed Income portfolio, we moved some of the exposure to intermediate-term bonds and Emerging Market bonds.

General Client Considerations

As 2023 comes to an end, please review your records to determine if you have any retirement accounts outside of our management that will require minimum distributions before 12/31/2023. If you are 73+ years old, you are subject to RMD rules.

Additionally, inherited IRAs, both traditional and ROTH, typically require annual distributions. If you have any questions regarding your responsibility to withdraw money from these accounts, we encourage you to reach out as soon as possible.

IRS annual contribution limits for 401(k), 403(b), most 457 plans and Thrift Savings Plans (TSP) are increasing in 2024 from $22,500 to $23,000. Changing your elections at the start of next year can help you to spread out contributions evenly and ultimately maximize your tax advantaged retirement saving.

Additionally, if you are 50 or older, the catchup contribution limit for 401(k), 403(b) and TSPs has remained the same at $7,500. Beginning in 2024, if you are born in 1974 or earlier, you can contribute up to $30,500 to these accounts in 2024. You do not have to wait until your 50th birthday to make catchup contributions - the contributions can start on January 1st of the year you turn 50.

Below is a summary of the 2023 and 2024 IRS Limits:

As always, reach out with any questions or concerns.

Thanks,

The Friedenthal Financial Team

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