Investors cheered on a better market in November, with both stocks and bonds rallying. Some of the best ETFs and mutual funds gained on hopes of more moderate Federal Reserve interest rate tightening.
Despite the optimism, the yield curve, which tracks interest rates for various maturities, inverted further. This usually signals an approaching recession. The 10-year U.S. Treasury yield fell 42 basis points, to end the month at 3.68%.
"November's been a pretty good month across stocks and bonds," said Bill Callahan, investment strategist at Schroders. "All eyes have been on the Fed, and the question is will they or won't they pivot. They keep saying they're not going to let off their monetary tightening. And the market continues to question that as the economic data comes in weaker and weaker."
Looking For Best ETFs In November
In late November, the Fed signaled that the December rate increase may be a more moderate 50 basis points. That's less bold than the prior four consecutive increases of 75 basis points this year. However, economists warned that the tightening cycle could be longer and the peak rate higher than the markets are currently expecting.
"Specifically in November, we saw bond yields come down," said Callahan. "This is basically the deepest yield curve inversion that we've had in a 40 years. Typically that signals recession, and usually the deeper the inversion, the worse the recession. And what we've seen is actually that the riskier, more cyclical, higher-beta market did quite well in November as bond yields came off, and the dollar came down."
Major equity indexes spiked, with the S&P 500 advancing 5.59%, Dow up 5.67% and Nasdaq rising 4.51%. The international developed markets index MSCI EAFE scored 6.43%.
U.S. diversified equity funds surged 4.83% during the month, trimming their yearly loss to 13.26%. Among the best mutual funds were equity leverage funds, up over 13% and multi-cap value funds, up 6.09%. Core funds also did well.
Finding Opportunities In The U.S.
The weaker dollar helped propel many international equity markets. Pacific region, Pacific ex-Japan, China region, emerging markets and European region funds all did quite well, with returns ranging from 12% to 24%, according to Refinitiv Lipper data.
Within U.S. sectors, precious metals equity, commodities base metals, international real estate and basis materials funds rallied between 12% and 17% in November.
"The market took a much more of a risk-on stance," Callahan said. "We saw materials and industrials rally, and we saw health care lag. Those are the types of things you see when the market is searching for a bottom and looking for what's going to be the situation in six months to a year from now."
Among the best U.S. diversified stock ETFs were iPath Schiller CAPE, Invesco S&P 500 High Beta and VanEck Morningstar Wide Moat, surging 15.41%, 9.46% and 8.75%, respectively. All three are still down on the year, however.
Dividend ETFs Still Rule
The best performers this year remain dividend funds, such as Invesco S&P Ultra Dividend Revenue, WisdomTree U.S. High Dividend and iShares Core High Dividend, with year-to-date returns of 10% to 13%.
Foreign equity ETFs skyrocketed. Top funds were KraneShares CSI China Internet, up 48%, Invesco Golden Dragon China, up 42% and Global X MSCI China Consumer Discretionary, up 36%.
Besides China, other top-performing countries included Turkey, Hong Kong, Taiwan, Poland, Netherlands, South Korea and South Africa, with returns between 17% and 26% in November. So far this year, the best foreign stock ETFs are iShares MSCI Turkey, iShares MSCI Chile and iShares MSCI Brazil, delivering returns of 90%, 22% and 17%, respectively.
Navigating A Possible Recession
With a recession looming, precious and other metals funds shone in November despite a lackluster 2022. IShares Silver Trust, abrdn Physical Silver Shares, Invesco DB Base Metals, United States Copper Index and abrdn Physical Platinum Shares shot up over 12%. Gold funds also did well.
"Gold has risen by about 6.5% so far for the month of November," said Jason Teed, co-portfolio manager of the Gold Bullion Strategy fund and director of research at Flexible Plan Investments. Its strong upward movement was nearly perfectly correlated to a 4.25% loss in the dollar index."
He explained that economic reports pointing to a slowdown in the U.S. pushed the dollar lower on anticipation of reduced aggressiveness by the Fed, which in turn provided a tailwind for gold.
"Currently gold prices seem to be pulled in two different directions, downward by the inflation-fighting Fed, and upward by expectations of a global recession," he noted. "Going forward it would seem that the metal is likely to face lesser downward pressure than we've seen for the majority of 2022, however, the timing of upward pressure, likely in the next few months, remains uncertain."
Which Are The Best ETFs For Bonds?
Bond funds benefited from falling long-term rates in November. General domestic taxable funds gained 2.58%, trimming their yearly losses to 9.86%. Among the best mutual funds were general U.S. Treasury, as well as corporate debt A and BBB-rated funds, surging upward 4% during the month. This helped reduce these bond funds' disastrous performance this year.
Top bond ETFs were Invesco Emerging Markets Sovereign Debt, iShares J.P. Morgan EM High Yield Bond and iShares 25+ Year Treasury Strips Bond, up over 10%. For the year, funds hedging against rising rates are still the outperformers, with Simplify Interest Rate Hedge and FolioBeyond Rising Rates surging 81% and 27%.
The authors of BlackRock Investment Institute's recently released 2023 Global Outlook wrote that "the four-decade period of largely stable activity and inflation, is behind us." As a result, they expect more macro and market volatility. Central bankers will continue their restrictive monetary policy, "deliberately causing recessions by overtightening policy to try to rein in inflation. That makes recession foretold. We see central banks eventually backing off from rate hikes as the economic damage becomes reality. We expect inflation to cool but stay persistently higher than central bank targets of 2%."
Bracing For More Volatility
In this context, bonds come to play a more significant role for investors looking for the best ETFs.
"Higher yields are a gift to investors who have long been starved for income. And investors don't have to go far up the risk spectrum to receive it," they wrote in the report. "We like short-term government bonds and mortgage securities for that reason. We favor high-grade credit as we see it compensating for recession risks."
That said, they don't think long-term government bonds will be good portfolio diversifiers due to persistent inflation. "And we see investors demanding higher compensation for holding them as central banks tighten monetary policy at a time of record debt levels," the report said.
Moving On To The Next Best ETFs
For equities, Diane Jaffee, TCW's managing director and senior portfolio manager for TCW Relative Value Dividend Appreciation (TGDFX) and several other funds, likes the transportation sector.
"The Dow Jones Transportation index has outperformed the S&P 500 since June," she said. "This is the infrastructure backbone of the United States. I think this is something we should pay attention to, that the industrial and transportation part of the U.S. have in the past been pretty strong contributors to market returns. And if they break into new highs, that would be very positive technically."
She also still likes the health care sector due to its innovation and research spending. The financial services sector, which has been very lackluster despite interest rates going up, is also an area that still holds promise. This pertains specifically to commercial and industrial loans. On the other hand, she's still underweight consumer discretionary.
Jaffee's main message to investors is to be diversified and stay defensive: "You really want to be disciplined, you really want to be diversified, and you want to take the emotions out of it as much as you can."
