Market optimism bounces back

“It is remarkable how much long-term-advantage people like us have gotten by trying to be consistently not stupid instead of trying to be very intelligent.”
– Charlie Munger, the legendary investor, who passed away this week at the age of 99.

• Inflation indicators dropped: the core PCE deflator fell to 3.5% in October, its lowest since April 2021, and headline PCE decreased to 3% (which was below expectations).
• A strong month for bonds and stocks: global bonds had their best month since 2008, and the U.S. Treasury Index rebounded to its late-2022 levels. The MSCI All Country World Index of stocks also saw significant gains.
• Corporate market optimism: corporate bond spreads and yields decreased, indicating investor confidence. Increased share repurchases and insider buying in the stock market reflected optimism about the economic outlook.

The core Personal Consumption Expenditures (PCE) deflator, a favoured inflation indicator of the U.S. Federal Reserve (the Fed), fell to 3.5% year-over-year in October, its lowest since April 2021 (and down from 3.7% in September). This decline was also reflected in the headline PCE, which fell to 3% year-over-year, lower than the expected 3.1%. Additionally, the Fed's recent focus had been on services inflation, excluding shelter, and this month it saw a significant drop from previously “sticky” levels, reaching its lowest level since March 2021.

This positive inflation news from the last few weeks is being felt in the bond markets. November was good for stocks, but also for bonds. In fact, it was the best month for global bonds since 2008, according to Bloomberg’s gauge of global sovereign and corporate bonds, which returned 4.9% in November. The U.S. Treasury Index returned to its late-2022 levels, erasing earlier losses of up to 3.3%. While 2023 was anticipated to be a strong year for bonds, the resilience of the U.S. economy, influenced in part by fiscal policies, led the U.S. Federal Reserve to prolong its aggressive tightening cycle. The MSCI All Country World Index of stocks also had a good month, its best since November 2020.

Corporate bond markets have also experienced positive shifts. The spreads on investment-grade global company debt are at their lowest levels since April 2022, and the average yield on corporate bonds has decreased to about 5.3%. This trend indicates growing investor optimism about a soft landing for the U.S. economy.

In the stock market, there have been reports of significant activities in share repurchases. Both Goldman Sachs and Bank of America experienced a notable increase in buyback activities. Insider data also revealed a surge in corporate executives purchasing shares of their own companies, with the ratio of buyers to sellers reaching six-month highs. This trend reflects a growing confidence among insiders about decreasing inflation and the end of rate hikes, signaling a broader sentiment of optimism in the market and a vote of confidence on the current economic trajectory.

Listen to this week’s podcast for further insights.