Key Points:
- The Federal Reserve signaled that the pace of rate hikes may slow down in December, suggesting that inflation in the US may have peaked.
- Stocks and bonds rallied in November on the notion of smaller rate hikes, but the inflation fight will continue into 2023.
- International stocks had their best month in two years with both developed and emerging markets gaining double digits on a weaker US Dollar.
The Federal Reserve has signaled that it plans to raise interest rates an additional 50 basis points in December, after four consecutive 75 basis point rate hikes. This suggests that they believe that inflation may have peaked and led to a risk-taking stance in November. Stocks and bonds rallied on the news with the S&P500 gaining 5.59% for the month. The investment grade bond market, which has suffered one of worst years in a generation, rallied on the Fed’s comments. The Bloomberg US Aggregate Bond Index gained 3.68% for its best month of 2022. Attractive yields and lower inflation expectations drew investor interest back into bonds, but a strong labor market may cause inflation to remain higher than the Fed’s 2% target into 2023 and perhaps beyond.
All sectors of the US stock market were higher in November. Materials (+11.76%) stocks were the biggest gainers followed by industrials (+7.85%) and financials (+7.04%). Consumer discretionary (+0.99) was the worst performing sector of the market as investors consider how deep and long a global recession next year might be. US stocks seem to be getting thicker skin as they absorbed a billion-dollar crypto exchange that went bankrupt in a matter of days and civil unrest in China over strict COVID lockdowns. Small cap stocks underperformed large caps and value stocks continued to dominate growth for the year. As we head into the final month of 2022, the Dow Jones Industrial Average is down just 2.89%, the S&P500 index down 13.1%, while the tech-heavy NASDAQ has fallen 26.13%.
International stocks had their best monthly return since 2020 with the developed market MSCI EAFE Index gaining 11.26%. Emerging markets (MSCI EM index) soared 14.83% after a very challenging year. The US Dollar weakened against foreign currencies, boosting US investor returns in stocks abroad. Asian stocks rallied on the hopes that China may soon relax its zero-COVID policy which has been hindering economic growth. European stocks also rallied after an uncertain year of energy supplies. Lower global energy prices combined with declining yields in US bonds seemed to be a main contributor to the weaking US Dollar Index.
Sources: Morningstar Direct, Wall Street Journal, First Trust, Merrill Lynch