November recap: A sheep in wolf’s clothing

Mike Loewengart, Vice President of Investment Strategy

E*TRADE Capital Management

Market sentiment can often be difficult to explain, but one thing is clear: There is little that investors dislike more than uncertainty. Despite a whirlwind of volatility in November, stocks rallied after two clarifying events—the midterm election results and Federal Reserve Chairman Jerome Powell’s remarks suggesting that the Fed’s monetary tightening campaign may be drawing to a close. Both occasions helped move the markets higher, despite what at times seemed like the beginning of the end for the nine-year bull market.
US equity performance, November 2018

Source: FactSet Research Systems, December 3, 2018

US equities  

Stocks took a beating during the middle weeks of November, with trade tensions and deteriorating sentiment within the tech sector weighing down major market indexes. In addition to technology, energy and telecom services stocks were the worst performers during the month, while more defensive sectors gained ground. Conversely, when considering 2018 as a whole, large-cap equities—growth stocks, in particular—have been the clear market leaders, despite delivering only modest returns for the year.

Sector performance, November 2018

Source: FactSet Research Systems, December 3, 2018

International equities  

Emerging market equities outperformed developed markets by a healthy margin in November—despite underperforming throughout much of the year. Clearly, synchronized global growth is no longer a valid thesis. Stocks in the UK were buffeted by uncertainty over Britain’s planned exit from the European Union next spring, and Prime Minister May’s proposed Brexit deal will face a difficult vote in British parliament this month.

International equity performance, November 2018

Source: FactSet Research Systems, December 3, 2018

Fixed income

High-quality bonds paced fixed income performance over the past year, with short- and intermediate-term Treasuries leading the pack. In November, however, longer-dated Treasuries outperformed amid a flight to quality that paralleled the downdraft in equities. With credit spreads widening, corporate bonds—especially high-yield issues—lost ground during the month.

Fixed income performance, November 2018

Source: FactSet Research Systems, December 3, 2018

The bottom line

As we close out November and look to the dawn of a new year, it may be instructive to revisit some of the key themes that drove performance over the past year.

Tariffs and trade: Much of this year’s market volatility was the result of tariffs, which have begun to eat away at corporate earnings. While the full impact of tariffs is yet to be seen, it’s clear they have already taken a toll in the form of heightened market volatility.

Rising interest rates: The Fed has raised interest rates three times this year and has signaled another rate hike in December. Even though the Fed’s moves have been well-telegraphed, investors have viewed rising rates as potential stumbling blocks to growth. So, it comes as little surprise that the markets soared last Thursday when Fed Chairman Powell signaled a more dovish stance toward interest rates.

Politics: October lived up to its reputation as a volatile month—in part because of uncertainty leading up to the November midterm elections. Once the results came in, the markets rallied. Now that Congress is divided, it remains to be seen how much legislation can get passed. This could be viewed in a positive light, as budget-busting legislation that could unnerve investors is less likely to pass. At the very least, investors have a better lay of the land.

International equities: International equities have underperformed for much of the year amid Brexit uncertainty, friction between the European Union and Italy, turbulence in Latin America, and global trade tensions. Translation: There’s a lot going on the world today that can affect global markets. But it’s not all bad news, and international equity valuations are relatively low, which could create a good entry point for investors.

Treasury yield curve: This would normally be a yawner, but not in 2018. That’s because an inverted yield curve has historically foreshadowed recession. The yield curve is still upward sloping, but it has flattened considerably over the past year as the Fed has hiked short-term rates. A flatter curve may be the new normal, but it adds an element of uncertainty to an already volatile backdrop.

What’s ahead in 2019?

Just a couple of weeks ago, the markets had given up a year’s worth of gains, and it appeared the bear had awoken from its slumber. Now, investors are charging into December with wind in their sails. The bull hasn’t been gored yet and could still have some life left. And why not? Despite numerous headline risks, the economy is still humming, unemployment is at a 40-year low, and energy prices are moderating. All in all, despite recent market volatility, it’s hard to argue that it’s been a bad year for the US economy. Indeed, there should be much to cheer when the curtain drops on 2018.

What might 2019 hold in store? Next month, we’ll take a sneak peek at the year ahead.

Thanks for reading, and I’ll see you again next year.


Mike Loewengart

Vice President, Investment Strategy

E*TRADE Capital Management, LLC


Additional contributor:

Andrew Cohen, CFA

Director, Investment Strategy

E*TRADE Capital Management, LLC

Mike Loewengart is the Vice President of Investment Strategy for E*TRADE Capital Management, LLC. Mike is responsible for the asset allocation and investment vehicle selections used in E*TRADE’s advisory platforms. Prior to joining E*TRADE in 2007, Mike was the Director of Investment Management for a large multinational asset management company, where he oversaw corporate pension plan assets. Early in his career, Mike was a research analyst focusing on investment manager due diligence for the consulting divisions of several high-profile investment firms. Mike holds series 7, 24, and 66 designations, as well as the Chartered Alternative Investment Analyst (CAIA) designation. He is a graduate of Middlebury College with a degree in economics.

Andrew Cohen is a Director of Investment Strategy for E*TRADE Capital Management, LLC. Prior to joining E*TRADE, Andrew was the Director of Investments and Operations for a large Registered Investment Advisor, where his responsibilities included investment manager research, asset allocation, and portfolio construction. Previously, he was a Senior Research Analyst and Team Leader for a leading wealth management platform. He is a CFA® charterholder and a member of both the New York Society of Security Analysts and CFA Institute. He is a graduate of Virginia Tech with a BS in finance.

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