The stock market experienced significant gains in November, marking two consecutive months of positive returns for major indices for the first time this year. The S&P 500, Dow and Nasdaq gained 5.4%, 5.7%, and 4.4%, respectively, on hopes that the Fed will slow its pace of rate hikes. The Nasdaq continued to underperform other indices as declining earnings and growth fears disrupt the tech industry. The VIX index of stock market volatility declined to 22.58. In contrast to major market indices, Bitcoin fell 16% to $17,104.50, following the collapse of major cryptocurrency platform FTX. How can we understand what drove markets in November?
Inflation dropped below expectations in the most recent report. Much to investor’s relief, the Core Consumer Price Index (CPI), a common measure of inflation which excludes the more volatile food and energy prices, slowed in November. The month-to-month inflation rate for core goods and services decelerated from 0.6% in September to 0.3% in October. While this is only one data point, inflation has been the focus of investors and the Fed all year. The fact that price pressures may be easing has been taken as a positive sign.
Markets expect a smaller Fed rate hike in December. After four consecutive 75 bps interest rate hikes in as many Federal Reserve meetings, market expectations are for a 50bps hike in December. For much of the year the Federal Reserve has been rapidly raising rates to fight inflation. Doing so also slows the economy, so this is a tricky balance. This is why markets cheered the possibility that the worst may be over.
Tech sector layoffs and the collapse of FTX worry investors. Despite the general optimism that drove overall markets, technology and cryptocurrency-related sectors struggled in November. The fear of recession and increasing interest rates have muted tech growth and major players such as Meta, Amazon, and Twitter are engaging in layoffs. The cryptocurrency contraction has been more dramatic. While cryptocurrency prices have declined steadily over the past year, the collapse of FTX, a major exchange, accelerated this trend.
Weighing China’s zero-Covid policy and protest’s effects on the economy. Investor confidence this month has been eroded by China’s continued commitment to a zero-Covid policy and its effects on the Chinese economy and foreign production of goods. As an important source of manufacturing, China’s zero-Covid policy is one factor that drove prices higher for consumers over the past year. Widespread protests in reaction to the policy also broke out across China.
In November markets proved to be resilient despite technology firm layoffs, the collapse of FTX, and possible supply chain disruptions in China. Improving inflation data has had wide reaching implications as interest rates have fallen from their highs and financial conditions have loosened. Investors are closely watching the Fed’s response and any hint of slowing rate hikes will likely be taken as a positive sign for the economy and financial markets.
Chart: Bitcoin and the S&P 500 took different paths in November.
Sources: Clearnomics, Bloomberg