After an exceptionally strong October for financial markets, it was not surprising to see them remain in place in November. Equity markets ended the month in slightly negative territory, mostly due to falling prices in the US and emerging markets. At the beginning of the month, it even briefly looked like there might be a correction because of growing concerns surrounding future interest rate cuts by the US central bank. The previously strong technology sector suffered the most, in both the US and China.
However, after Fed Governor John Williams indicated in a speech that he was in favor of further interest rate cuts, the market managed to recoup a good portion of the losses. An interest rate cut in December is now more than 85% priced in. That not all asset classes were able to benefit from this, bitcoin for example continued its decline during the month, does indicate the strength of loose financial conditions is beginning to wane.
The visible sensitivity of the equity market to the likelihood of further interest rate cuts underscores our view that markets are currently walking along a narrow upward path. There is little room for disappointment. Another example of that dynamic was the reaction to Nvidia’s strong earnings results. This caused the share price to rise sharply aftermarket, but it did not last because of growing concerns about a possible bubble in AI investment. For example, there are more and more voices saying that these investments will not deliver the hoped-for returns. And resistance is also growing, particularly from local politicians, due to the impact of data centers on water and power consumption.
When markets remain in place after a strong period, sensitivity to new information is often especially high. That sensitivity currently coincides with a period when a lot of important economic information from the US is not available. While the US government has now “reopened”, a lot of data is distorted or has yet to be backfilled. The labor market data, for example, has been directly affected by the shutdown. While other data points, such as the October and November inflation reports, won’t published until after the upcoming Fed meeting. That makes the Fed’s job extra difficult, and the question is how it will deal with that uncertainty. If John Williams’ signal is misinterpreted by the market, it will lead to volatility in the markets. December could therefore be an interesting month, both positively and negatively.
In our next Monthly Letter, we will look ahead to 2026 and the various scenarios we consider.
BY: WOUTER STURKENBOOM, Chief Investment Officer