Market and economic commentary
November 2023

Signs that inflation may be meaningfully decreasing drove equity and bond markets globally into positive territory for November. Specifically, in the first half of November, the US headline Consumer Price Index (CPI) showed decreases in both the core and headline figures, along with some language from the US Federal Reserve (the Fed) suggesting that further hikes may not be necessary. The Compass Portfolios and ATBIS Pools (the Funds) saw positive performance for the month. Find up-to-date performance data here.

Below are index total returns in Canadian dollar (CAD) terms for November and year-to-date, respectively:

Economics

Inflation was the focus of markets again in November, as US headline CPI came in lower than expected at 3.2%, with core inflation continuing to decline, rising 4% on an annual basis. Both figures were weaker than expected as energy prices continued to decline year-over-year, and food prices increased (3.3% year-over-year) at the slowest rate since June 2021. The shelter component of core CPI—the most significant contributor—finally fell below 7% to 6.7% for the first time since October 2022. With the 30-year average mortgage rate hitting around 8% at the end of October and the Zillow Rent index taking roughly 12 months to peak, the indications suggest that the shelter component will continue to fall. At home, Canadian inflation figures were also positive, with headline inflation dropping to 3.1% as fuel prices continued to fall. The Bank of Canada’s (BoC) preferred core measures also fell, averaging 3.6%. BoC governor Tiff Maklem commented that the “excess demand” that “made it too easy to raise prices” is no longer present. While these comments were encouraging, the CPI report also noted that rent rose 8.1%, the highest on a monthly basis in over 40 years.

The other side of the inflation picture—growth—was a mixed bag for Canada and the US. In the US, annualized quarterly Gross Domestic Product (GDP) for Q3 was a whopping 5.2% amid strong residential investment and demand for goods. Conversely, Canada’s annualized quarterly GDP dropped by 1.1%. Although one might think that triggers a technical recession, as the previous quarter also contracted 0.2% when the figures were published last quarter, Q2 was revised up to 1.4%. Digging into the details shows that the primary driver of the decline in GDP was exports, although domestic demand showed weakness, especially when removing the addition from government spending. Employment on both sides of the border was also mixed, as the unemployment rate for Canada and the US rose 0.1% to 5.7% and 3.9%, respectively, even as both countries added jobs in November. 

Equities

Equity markets were generally positive as investors cheered on falling inflation and the prospect of rates peaking, with rate cuts on the horizon sooner than later. All of the Funds’ equity components shared in the excitement, and all rose on an absolute basis. Strength in the Canadian dollar versus the US dollar took away around 2% from overseas returns over the month, but all major regions remained positive. 

In Canada, stocks were largely driven by financials, but performance was divided between banks and their non-bank counterparts, with non-bank financials contributing more overall to the index. Shopify rebounded from last month, rising just over 50% in November, and was another key driver of index performance, adding around 1.4% to the TSX alone. Valuations overall in Canada remain relatively attractive, and financials—banks in particular—are still trading at historically low levels. Overall, earnings in Canada were varied. With around 96% of companies reporting, about half were in line or missed expectations. Results were consistent across sectors, so it isn't necessarily one particular area of the market starting to show weakness, and earnings growth overall seems to be falling.

Elsewhere, US and international equities performed well over the month. Information technology led the US again—namely Microsoft, Apple, and Nvidia who posted double-digit gains—as investors cheered on falling inflation and yields. International stock gains were a little more diversified as the top four sectors (industrials, financials, IT and consumer discretionary) all added between 1% and 2% of the index’s performance, as opposed to the US, where IT alone was responsible for over 3.6% of the index performance. Even with the strong performance over the month, valuations remain at levels that make international stocks more attractive than their US counterparts.

Fixed Income

Although bonds didn’t gain as much as equities, the drop in yields from favourable inflation news and dovish statements from central banks made bond investors happy during November. Canadian bond yields on average fell 0.56% as measured by the FTSE Canada Bond Universe through the month. Yields dropped across the curve other than in the very short (<1yr) end, as the inflation and growth data—both important factors for the market pricing long-term yields—suggested slower growth and some positive progress towards slowing price levels. Portfolios with longer durations were the primary benefactor of a movement in the yield curve like this. As a result, the funds underperformed due to their shorter-than-index duration. It was almost entirely a story of falling yields, as corporate and high-yield bond spreads were little changed and saw less benefit.