September – November 2023
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September to November 2023 was relatively flat for investment markets, with key Western equity indexes either slightly positive or negative overall. However, this cumulative figure masked a volatile market period, with investment markets falling in October and rallying back strongly in November. The S&P 500 ended the period up +1.33% after it rose from 4,508 to 4,568, though the index also saw a fall of -8.66% to 4,117 at its lowest point on 27th October. The S&P Euro Plus mirrored the US by rising slightly +1.12% from 2,258 to 2,283 and also similarly saw a fall of -6.80% to 27th October. In the UK, the FTSE 100 rose by +0.20% from 7,439 to 7,454 – also enjoying a much gentler path with a fall of -1.99% to its low point.
The October market decline was chiefly driven by US political upheaval following the removal of Speaker Kevin McCarthy by a faction of hard-right Republicans. This sparked volatility in the bond market, particularly in longer-term US bond yields, as investors extrapolated the ramifications of persistent fiscal upheaval. After three weeks of chaos where the House lacked a head, with numerous Republicans failing to garner enough support, ultra-conservative Mike Johnson became the new Speaker on October 25th, calming markets and setting the stage for strong November returns in equity and fixed-income markets.
Higher yields in bond markets have a knock-on effect on equities for numerous reasons – the most pertinent being that it affects the discount rate market participants use to value a firm’s future earnings. Companies whose share prices are mainly based on tomorrow’s, rather than today’s, earnings are therefore more affected by this dynamic, with sharply increasing bond yields generally resulting in such share prices coming under pressure. The prevalence of these types of companies, particularly in the US stock market, intensified October’s market impact. At the opposite end of the spectrum, the makeup of the FTSE 100 means it has less weight on businesses with high anticipated earnings growth and instead has more exposure to mature companies with stable cash flows, which limited the impact of rising bond yields. The US 30-year bond yield in October reached a peak of 5.106%, later dropping to 4.442% on 29th November.
Also helping buoy returns in November were cooler than expected inflation prints in the eurozone, US, and UK – with each coming in at 2.9% (vs 3.1% expected), 3.2% (vs 3.3%), and 4.6% (vs 4.8%), respectively. After two years of roaring inflation dominating the market agenda, these figures, whilst still higher than central bank targets of 2% are now within a range far easier to stomach. Indeed, it is now looking likelier that the peak in the current rate-rising cycle might now have been reached, as shown by the minutes of the Fed’s November policy meeting stating that they will proceed ‘carefully’ and only raise rates if inflation deteriorates again. This marked an alteration in tone from their September meeting, where a ‘majority of participants’ judged that a further increase would be needed.
In October, the world was shaken by the Hamas-led invasion of Israel after militants breached the Gaza-Israel barrier, resulting in over 1,000 Israeli civilian deaths and approximately 240 people taken hostage, including those at the Re’im music festival near the border. The Israeli government reacted furiously, declaring war the next day, leading to escalating casualties over the last couple of months and ultimately culminating in calls for a ceasefire. Despite the sensitivity of discussing the investment ramifications of such harrowing events, I will just note Israel’s minimal (0.16%) representation in the FTSE All-World index and, therefore, the small direct impact of volatility in Israeli asset prices on globally diversified portfolios. The Middle East, more broadly, is a region with significant ties to oil markets, which could stoke inflation globally if upset. Despite an initial 5% surge post-attack, oil prices ended November at around $75 per barrel, comfortably lower than before the attack.
In the UK, Chancellor Jeremy Hunt unveiled his Autumn Statement on 22nd November, an event which was closely watched by market participants after the chaotic aftermath of Liz Truss and Kwasi Kwarteng’s ‘mini-budget’ in September 2022 – an event which ultimately led the country to the brink of a financial crisis as soaring UK government bond yields created stress in the UK financial sector which ultimately necessitated the Bank of England to intervene. This time around, the headline policy was a 2% cut in National Insurance, and the market reaction was much more muted – with no major moves for currencies, bond yields, or equity indexes through to the end of November. It has also been a relative victory for the government since, unlike 12 months ago, neither the Prime Minister nor Chancellor has been forced out of office.
