TLT - A November To Remember: Stocks Surge As Inflation Fears Disappear VBR A Buy

2023-11-30 15:30:05 ET

Summary

• Stocks rallied in November, with the S&P 500 and Nasdaq 100 ETFs surging 9% and 10% respectively.
• Mid and small-cap equities rebounded strongly, while foreign companies also performed well.
• Tech and real estate were the top-performing sectors, while all sectors except energy finished in the black.

Stocks rallied big in November. A late spurt into the month's end, despite a modest pullback on Thursday, capped off one of the S&P 500's (SP500) best months of the past three decades. All told, the SPDR® S&P 500 ETF Trust (SPY) surged 9% to climb ever closer to a 52-week high. The Invesco QQQ Trust ETF (QQQ) outperformed most other areas amid the steep bid to bonds and fall in yields. The Qs were up 10% for November.

Elsewhere, mid and small-cap equities snapped back in a big way after lackluster, even negative, YTD performances through October. The SPDR S&P MIDCAP 400 ETF Trust (MDY) rallied 8% while the iShares Russell 2000 ETF (IWM) jumped 9%. Foreign companies performed well, too. The Vanguard FTSE All-World ex-US Index Fund ETF Shares (VEU) rebounded 8% last month - it underperformed despite a sizable decline in the US Dollar Index (DXY).

Equities Post Historic November Gains, Mega-Cap Tech Leads

Digging down to the sector level, Tech (XLK) led the way, but a strong showing from the previously beaten-down Real Estate niche (XLRE) offered some breadth to November's stock market recovery. All sectors sans Energy (XLE) finished in the black.

Tech & Real Estate Were the Top November Sector Performers

Turning to the fixed-income market, a much more sanguine market stance on the inflation outlook helped catapult all areas of the bond space. Taking a long-duration bet on Halloween proved to be prescient as the iShares 20+ Year Treasury Bond ETF (TLT) actually outperformed the SPX for the month - sporting a more than 10% total return.

High-quality corporates, as measured by the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) rose 8% while junk bonds, which carry a shorter weighted-average duration, gained "only" 5%. The Treasury market as a whole returned 4% with the entire yield curve retreating.

Bonds Bounce Back Big In November

Helping to drive rates lower, setting up the positive equity-market backdrop, was a series of better-than-expected inflation reports. October CPI, PPI, prices paid internal numbers with various surveys, and October's PCE report all were generally on the side of the doves. On the final day of November, the Q3 and October PCE numbers, the Fed's preferred inflation gauge, came in not far from estimates. Importantly, though, the 3-month annualized CPI rate now stands within earshot of the FOMC's 2% target rate at just 2.4%.

Core PCE Inflation Retreating Toward the Fed's 2% Target

The month that just finished up might very well go down as the period in which concerns about further rate hikes pivoted to optimism about imminent rate cuts. The CME FedWatch Tool currently prices in the potential for five quarter-point policy rate decreases in 2024, with the first possibly coming at the March meeting. This reality creates a conundrum for investors holding a high amount of cash - reinvestment rate risk is real, and buying in now versus 12 months from now likely prompted part of the November stock market rally.

A Handful of Rate Cuts Priced Into 2024

As for the growth situation, the Atlanta Fed's GDPNow models out Q4 real US GDP growth of just under 2% following a more than 5% expansion pace in the previous quarter. Concerns still linger for how the first half of 2024 will unfold - some strategists call for a significant growth slowdown, potentially resulting in a mild recession. Still, the consensus feels like it has indeed honed in on a Goldilocks "soft landing" narrative as inflation retreats and the economy continues to expand.

Q4 US Real GDP Growth Seen Moderating Vs. Q3's Hot Print

Investors are feeling the optimism, too. The weekly poll of retail traders by the American Association of Individual Investors ((AAII)) revealed on Thursday that the net-bulls percentage is the highest since early August - shortly after the stock market peaked in the summer. Is there too much frothiness out there ahead of the traditional Santa Claus Rally period (the last five trading days of the year and the first two sessions of the following year)? We'll know soon.

Investors Increasingly Bullish As Stocks Rise In November

Some caution may indeed be warranted. According to data gathered by Ryan Detrick at Carson Group, the first half of December tends to be rather "meh," with investors needing to be patient for gains that have historically been focused over the back half of the month.

December Gains Often Back-Half Loaded

Let's focus on the small-cap value slice of the domestic stock market. The Vanguard Small-Cap Value Index Fund ETF Shares (VBR) is one of the most popular ways to go overweight this factor. I was previously bullish on the fund at the start of the second half, but there has been a fair amount of turbulence for fellow investors in the fund. I reiterate my buy rating.

According to the issuer, VBR seeks to track the performance of the CRSP US Small Cap Value Index, which measures the investment return of small-value stocks and provides a convenient way to match the performance of a diversified group of small-cap value companies.

VBR is a large ETF with more than $43 billion in assets under management, and it pays a 2.3% dividend yield . Share-price momentum has certainly improved in the last handful of weeks and liquidity with the fund is almost always strong - it currently earns an A+ ETF Grade on that front from Seeking Alpha. With a very low annual expense ratio of just 0.07% and moderate risk exposure, it should be considered a solid choice for long-term investors seeking to go overweight the lower-left section of the style box.

VBR features much more exposure to the cyclical Industrials sector, and Financials are relatively overweight compared to its percentage position in the S&P 500. VBR is somewhat light in the growth-heavy Information Technology sector while Energy and Materials are significant positions versus the SPX, too. With a current price-to-earnings ratio of just 10.6 (as of October 31, 2023, per Vanguard), the fund is very cheap compared to the broader market. Given a nearly 9% November climb, the prospective P/E is likely closer to 11.4 today - still a solid bargain in my view.

VBR: Holdings & Dividend Information

The Technical Take

VBR continues to consolidate. Notice in the chart below that shares hit an all-time high more than two years ago above $187. After a series of lower highs, but also holding key long-term support at the $143 mark (the August 2018 peak), small-cap value bulls keep on waiting for a definitive uptrend to come about. I spot a downtrend resistance line off the all-time high that currently comes into play near $173 - a rally through that line may lead to a fast approach to the peak from two years ago.

Also, take a look at the long-term 200-week moving average - it remains marching higher, and it has been a place of buying on several occasions since the middle of last year. Finally, I see a high amount of volume by price in the $155 to $176 zone - that could make rally attempts tough sledding for the bulls looking into 2024.

Overall, if VBR manages to hold the low to mid-$140s range, the chart is good enough to warrant a position.

VBR: A Persistent Consolidation, Holds Critical Support in October

The Bottom Line

While Vanguard Small-Cap Value Index Fund ETF Shares has been a frustrating fund to be overweight at times in the last 24 months, I see value in the portfolio while its technical situation is somewhat neutral.

Bigger picture, the market's intense November jump sets up well heading into year-end, though the first two weeks of December are commonly rocky. For the economy, interest rate cuts are likely in store sooner rather than later, and continued strong economic growth should help corporate profits over the next several quarters.

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