🔒 November’s unconventional market rally sparks 2024 optimism – Mohamed A. El-Erian

In a November investors won’t soon forget, risky assets like stocks and high-yield bonds soared, defying traditional correlations. A Goldilocks blend of economic data, declining yields, falling oil prices, and deployed sidelined cash fueled an unprecedented convergence of market risk factors. The Nasdaq surged 10.7%, while even risk-off assets like gold and Treasury bonds performed well. Analysts express confidence for 2024, but challenges loom, from navigating inflation’s “last mile” to sustaining productivity growth and addressing high valuations. The extraordinary rally demands ongoing efforts to preserve this unique alignment of risk factors.

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Uncertainty Looms Over a November to Remember: Mohamed A. El-Erian

By Mohamed A. El-Erian

(Bloomberg Opinion) — November will be etched in the memories of investors as a remarkable month.

Risky assets, such as stocks and high-yield bonds, delivered exceptional returns. Even assets that are traditionally negatively correlated to them, such as US Treasury securities and gold, experienced notable upward price movements. Money that had been on the sidelines found its way into a diverse array of investment opportunities. Companies rushed to issue new bonds to finance investments and bolster their reserves. And all this fostered increased confidence and optimistic projections for the market and economy in the coming year.


This extraordinary November was propelled by four key factors: Goldilocks economic data, declining yields, falling oil prices, and a surge in the deployment of cash sitting on the sidelines. Together, they created an unusual convergence of the three primary risk factors shaping market returns and correlations. Extrapolating all this forward, however, is subject to important qualifications that might well be underestimated during a period of understandable euphoria.

Let’s start with the numbers that are so pleasing to most investment portfolios.

In November alone, the Nasdaq 100 experienced a 10.7% surge that, unlike the recent past, was not confined to a select few high-performing stocks. Indeed, the S&P 500, Dow Jones Industrial Average and Russell 2000 index of small companies all registered gains of nearly 9%. Similar robust advances were seen in other risk assets, including high-yield bonds. Notably, the VIX Index, known as Wall Street’s fear gauge, sank to its lowest level in nearly four years and traded below 13 on several occasions during the month.

Risk-off assets too performed well in this risk-on month, contrary to what the traditional finance textbooks would tell you. Gold gained 2.7%, and a stunning broad-based drop in Treasury yields drove up the price of the 10-year US government bond.

The confluence of four factors played a pivotal role in these developments.

Firstly, most US economic data releases last month consistently supported the idea of a soft landing for the world’s largest and most systemically important economy, indicating continuous progress in reducing inflation without significant growth sacrifices. This was particularly the case for price data, all of which showed further declines in inflation, and the numbers for business investment and household consumption.

This paved the way for the second factor: notably lower Treasury yields, which reduced borrowing costs across households, companies and government entities. From mortgages to auto loans, and from corporate lines of credit to bond issuances by local and state governments, the cost and availability of funding improved significantly as traders bet that the Federal Reserve and other central banks have not only finished raising policy rates but would also be cutting them next year.

The drop in international oil prices reinforced the first two factors by alleviating fears of stagflation. Lower energy prices translate into reduced cost pressures for companies and households, increasing their flexibility to spend.

The fourth factor, more technical in nature, involved a substantial repositioning of investible funds into products with greater credit and duration risk. This included what Bloomberg reported as a record-breaking $12 billion inflow into exchange-traded funds tracking high-yield debt. The deployment of funds facilitated an increase in corporate bond sales. Investors even warmed to the issuance of once-maligned additional tier 1 bonds, which had one of its strongest months.

It’s not surprising then that an increasing number of analysts are expressing substantial confidence in the performance of markets and the global economy in 2024. After all, these factors have contributed to the rare favorable alignment of the three major market risks — interest rates, credit and liquidity — supporting virtually all asset classes. However, transforming what is desirable for the economy and markets into reality is not automatic, especially considering the economic, financial, political and geopolitical environment.

The obstacles policymakers will face in the “last mile” of their inflation challenge are uncertain. Some, including the OECD, have warned that it constitutes the most difficult part of the journey while others, such as Goldman Sachs Group Inc., have proclaimed it the easiest. Meanwhile, central bank specialists continue to struggle with such basic questions as what constitutes the equilibrium level of interest rates, or r-star.

As regards growth, the engines of the economy may sputter without further invigorating reforms, especially in the face of dwindling savings and other headwinds. Not enough is being done to fundamentally revamp productivity growth. Also, apart from the US, few countries have adopted measures that facilitate the transition to higher and more inclusive growth that respects the planet, including new public-private partnerships for the energy transition, and to oversee and advance artificial general intelligence and life sciences.

The incredible rally in asset prices will also need to navigate two other issues: high valuations that require early validation from both lower inflation and consistently robust growth; and questions about the continued ample availability of buyers to absorb significant new issuance, including from governments running large deficits and refinancing existing debt at considerably higher interest rates.

Paul McCulley, one of my former Pimco colleagues, often remarked along the lines that “you don’t get to go to heaven twice for the same good deed.” The current extrapolation of a November to remember for investors may have a sense of this unless more is done to maintain this exceptional alignment of risk factors.

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