Wall Street Big November Reversal – Will It Last?

After a week in October, Wall Street staged a strong comeback in November, and support is building around the mid-October lows, according to an investment strategist.

Traders and investors shook off all the doom and gloom about the elevated inflation and the prospect of an impending recession and drove debt and equity markets higher.

All major U.S. equity indexes finished higher in November, with the tech-heavy Nasdaq leading the gains as market volatility ebbed. In addition, the benchmark 10-Year Treasury bond prices posted solid gains driving yields lower.

Lower oil and gasoline prices added fuel to the debt and equity rallies.

Angelo Kourkafas, CFA, investment strategist at Edward Jones, thinks November will be remembered on Wall Street as the month of reversals. They will be a stark reminder of the importance of staying invested rather than trying to time the market.

"Beyond providing portfolios with some relief, November was a month that included some major reversals," he told International Business Times in an email. "The VIX was falling back to its historical average, longer-duration bonds outperforming shorter-duration bonds, Chinese equities leading global markets higher on reopening hopes and the U.S. dollar having its worst month since 2010. Also, gasoline fell to its lowest price before Russia invaded Ukraine."

Quo Vadis President John Zolidis attributes the reversal to the resilience of the American consumer, who has yet to "blink" on the Fed's interest rate hikes. That's thanks to a strong labor market, which provided steady paychecks to households. "The single most relevant factor in consumer spending is jobs," he said in a briefing to his subscriber. "When U.S. consumers have incomes, they spend. Saving is what happens for Americans when the spending is done, not the other way around. More than 20 years of experience following the consumer sector has taught us not to bet against the U.S. consumer's propensity to spend."

Strong consumer spending has helped reverse some of the negativity in discretionary consumer stocks, which have gained more than 20% over the past two months.

Kourkafas sees the November reversal as a sign that the market is sniffing out a gradual easing of the two most significant headwinds that have been weighing on portfolio performance this year — high inflation and aggressive Fed policy.

However, Kourkafas is skeptical about whether the reversal will continue at the same pace next year due to Fed policy lags. "Past rate hikes will likely weigh on the economy through 2023, raising the risk of a mild recession," he said.

Then there are the larger-than-average EPS revisions. Wall Street analysts revised EPS estimates for S&P 500 companies in the last two months downward for the fourth quarter by a more significant margin than average. "The Q4 bottom-up EPS estimate (which is an aggregation of the median EPS estimates for Q4 for all the companies in the index) decreased by 5.6% (to $54.58 from $57.79) from September 30 to November 30," John Butters, vice president of FactSet, wrote in a blog post.

Moreover, the labor market is resilient, as evidenced by recent data, which complicates monetary policy.

Still, Kourkafas believes that the investment backdrop is no less complicated now than in June when the S&P 500 first slid to a bear market. "Yet as investors and policymakers gradually gain some comfort that the tide of inflation is receding, the worst-case outcomes will narrow, and support around the mid-October lows will keep building," he said.