Investors got a mixed bag in November as what was already a choppy month delivered the worst single day return of the year for the S&P 500. The flagship benchmark ended in the red with a -0.69% return, with Technology and Consumer Discretionary sectors producing the only positive returns at 4.35% and 1.97%, respectively. The darlings of the previous month, Energy and Financials, along with Telecoms, were the worst performing sectors in November, losing 5.09%, 5.68% and 5.16%, respectively. Most other main equity asset classes were negative in November, with mid and small caps losing 2.94% and 2.29% and international markets struggling significantly (developed -4.65% and emerging -4.08%). The main bond index, the Bloomberg Barclays Aggregate, finished with a slight gain of .30% due to a decline in interest rates. 

Investors were probably feeling sanguine heading into the Thanksgiving holiday. Sure, the middle part of the month had been choppy. After a 9.33% return for the S&P 500 from October 4 through November 8, it was only reasonable to expect some sideways price movement. Concerns around inflation and rising interest rates were the main cause for consternation. The Headline Consumer Price Index (CPI) came in at a year-over-year increase of 6.2% on November 10—this exceeded the previous month’s print of 5.4% and the consensus estimate for the month of 5.8%. Even if you strip out the more volatile components of food and energy, the CPI still grew at a year-over-year pace of 4.6%, well above the Fed’s long-term target of 2%. Because longer-dated interest rates are reflective of inflation expectations, these CPI numbers sent the yield on the U.S. 10-year Treasury from a low of 1.43% on November 9 to a high of 1.67% on November 23. Even though stocks tend to be a good inflation hedge over the long run, stock investors typically get jittery when interest rates rise quickly, and such was the case in mid-November. While the S&P 500 (large cap stocks) was only negative by 0.14% from November 9 to November 23, mid caps and small caps both lost more than one percent. One measure of small caps, the Russell 2000 index, lost 4.65% over that period. Nonetheless, the S&P 500 was still positive by 2.21% for November and nearly 27% for the year when the exchanges closed on Thanksgiving Day Eve. Markets were also boosted by President Biden’s decision to nominate current Fed Chair Powell for another four-year term in the office.

Enter Omicron. While you were resurrecting your leftovers for an early lunch on Black Friday, markets were experiencing their worst day in 2021. With news of a new Covid-19 variant coming out of Africa, the S&P 500 lost 2.27%, the Dow lost 2.53% and the NASDAQ lost 2.23%. Bad news always seems to have a greater impact on these holiday-adjacent half days—trading volume is down because less institutional traders are working. It was like a mini-March 2020 all over again. While the decline was small in comparison to some of those early days of the Covid outbreak, it traced many of the same lines. Travel stocks and other sectors of the traditional economy were pummeled while the stay-at-home trade in names like Zoom, Peloton and Netflix went back on. The price of oil, which hit its highest level since 2014 back in October at nearly $85 per barrel, plummeted as low as $64.57 on the last day of November as fears of the new Covid variant’s impact on the economic reopening took hold. The yield on the 10-year Treasury fell from 1.64% to 1.48% over the course of Black Friday.

While stocks rallied on the subsequent Monday, it was nowhere near a full rebound. On Tuesday November 30^th stocks opened negative as Omicron fears persisted and then losses accelerated after Chair Powell remarked that it was “probably a good time to retire” the word “transitory” when describing the current state of inflation expectations. In other words, the Fed is acknowledging what many others had been speculating for months—that inflation may not be attributable only to weak prior year comparisons and supply chain issues, but in fact may be more persistent. While Powell was quick to reiterate that he still expects inflation to fall closer to central bank’s 2% target over the course of 2022, this nonetheless represented a change in perspective from the Fed. Significantly, Powell also stated that it is “appropriate… to consider wrapping up the taper of our asset purchases… perhaps a few months sooner.” For those who don’t regularly hear Fedspeak, this was Powell’s way of saying that the policy of easy money, which has been a tailwind for stocks, will likely end sooner than expected.

As we turn to the last month of what has been a great year for investors, markets are in a pivotal position. Will the Omicron variant impede the reopening enough to send stocks much lower, or will it be a relatively navigable road bump in the global economic recovery? Will inflation cool down after we get through the holiday season enough to accommodate a soft landing from the Fed, or will rising prices compel the central bank to tighten policy sooner than investors can tolerate? While the current threats on the horizon don’t appear as severe as what investors faced in early 2020, they can still make for an uncomfortable ride in the near term.

Volatility reared its ugly head in November, a gut check opportunity for investors to make sure they aren’t taking on more risk than they’re comfortable with. While it’s never fun to see red on the screen, days with big losses are an important mechanism for keeping investors grounded and their euphoria in check. Your portfolio’s positioning should be driven by your individual tolerance for risk and the goals you hope to accomplish, not by greed when things are good and fear when they’re not.

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