Weekly Investment Update (12/01/2023)

This Week’s Views and Positioning

The S&P 500 is now up about 11% since the October low, with nearly eight percentage points of its appreciation occurring at the start of November. However, more recently, we’ve seen stocks consolidating just under year-to-date highs, essentially flat over the past two weeks. With only weeks left in the year, investors may be wondering if a strong November could steal from the typical December Santa Clause rally. The bottom decile of November performances have often been followed by an above average last month of year, but the top decile of November performances has been followed by a wide range of performances in deciles two through nine. In short, historical data does not support the idea that this December will be influenced by the preceding market rally.

An important market driver will continue to be inflation. We maintain our view that Fed commentary that appears hawkish (“higher for longer”) is far less important than the actual data. This week, the Core Personal Consumption Price Index, the Fed’s preferred measure of inflation, indicated additional slowing of inflation momentum. This was accompanied by a shift in language from Fed Governor Waller: “There is no reason to say we will keep it [the federal funds rate] high.” We think the incrementally dovish tone is notable, with a key Fed official acknowledging the need for policy flexibility, which the data continue to support. Bessemer bond portfolios maintain a duration position above the benchmark, which should benefit from a move lower in interest rates.

Holiday Spending Reveals a Resilient Consumer

What happened: Black Friday and Cyber Monday headlines grabbed attention early in the week. Consumers spent a record $9.8 billion on Black Friday online sales, an increase of 7.5% from 2022 (not inflation adjusted), and spending was even stronger on Cyber Monday with sales of $12.4 billion, up 9.6% from 2022, according to Adobe Analytics. Amazon, Shopify, Square, and Afterpay all reported records across various sales and transaction metrics. Overall spending (both online and in stores) remained solid amid the backdrop of easing inflation. Mastercard’s Spending Pulse insights revealed overall spending increased 2.5% (not inflation adjusted) on both online and offline combined versus last year, a deceleration from the 12% year-over-year growth seen in 2022. However, given the disinflationary backdrop this year, spending growth was driven by net new demand, not just price increases. October’s consumer spending data similarly showed a moderate rise in real consumption, which increased 0.2% month-over-month after a 2.6% annualized increase in the third quarter.

Why it matters: While a fairly small portion of the economy, a few days of holiday purchases can provide a timely update on the health of the consumer. Additionally, as many retailers make a solid portion of their revenues during the holiday season, company commentary on the holiday weekend can give investors insight into how the fourth quarter is tracking. Overall, spending largely came in better than feared, both in stores and online. 2023 has been characterized by a resilient consumer, driven in large part by a tight labor market. Still, we expect consumer spending to slow in the year ahead as higher interest rates serve as a headwind to households. We note that in addition to robust holiday spending, the use of buy-now, pay-later services also increased, a sign that consumers may be increasingly turning to credit as pandemic savings dwindle.

Gold Price Rises Amid Geopolitical Tensions and Falling Yields

What is happening: The price of gold has increased by 12% over the past two months, surpassing $2000/oz, driven by heightened geopolitical tensions, falling real and nominal bond yields, and a weakening dollar. Current tensions in Europe, the Middle East, and China-Taiwan suggest continued geopolitical unrest; amid heightened geopolitical tensions, investors often turn to gold. Moreover, the Federal Reserve's indication of ending its interest rate hiking cycle, along with market expectations of interest rate cuts in 2024, have led to lower yields and a softer dollar. The price of gold has historically been inversely correlated with yields and the dollar. Investors typically purchase gold and bonds as safe-haven assets, and gold becomes more attractive when yields decline as it is a non-interest-bearing asset. Furthermore, gold is generally dollar-denominated, and a depreciating dollar results in a lower gold price for other currencies, increasing its demand globally and ultimately its price.

Why it matters: Gold's near-term trajectory is often a function of geopolitical tensions and expectations for interest rates. In our view, global geopolitical tensions are likely to remain elevated. Moreover, declining inflation and recent softer economic data could provide support for the Federal Reserve to cut interest rates next year. The expectation for lower rates and elevated geopolitical tensions should support demand for gold. However, potential risks including unexpectedly strong economic data, a resurgence in inflation, or delayed interest rate cuts, could restrain gold's upward price trend. Bessemer's All Equity Portfolio maintains gold exposure through a tactical overweight to gold miners.