Monthly Market Update - November 2023


  • Intermediate and long-term rates increased, with the 30-year Treasury yield breaking through 5% for the first time in almost twenty years.
  • The stock market experienced a strong first half of the year but has since seen a decline, with the S&P 500 dropping 2.1% in October, bringing the year-to-date return to 10.7%.
  • October's market decline was broad, driven by expectations of prolonged high interest rates, resulting in a downturn across all S&P 500 sectors except Utilities.

The first half of the year was an unexpected bounty for the stock market as the S&P 500 Index gained more than 20% through the end of July. Almost half of that gain has since been whittled away, with a -2.1% additional decline in October, bringing the year-to-date return to 10.7%. Smaller companies have struggled even more, with the Russell 2000 Index declining 7.7% during October and now down 4.5% for the year. As we have been emphasizing, the average company within the publicly traded markets this year has fared worse than the S&P 500 Index, whose return has been dominated by the double-digit returns of a handful of mega-cap companies. An equal-weighted index of the S&P 500 companies is down 3.9% this year.

Short-term interest rates remained steady during October, and the Federal Reserve announced it is keeping the federal funds rate steady at 5.5%. Intermediate and long-term interest rates continued advancing higher during October, with the 30-year Treasury yield breaking through 5% for the first time in almost twenty years. The spread between corporate bond yields and Treasury yields continues to be narrower than historical averages, indicating the market is not yet concerned about credit risk in this higher interest rate environment.

The October decline was broad, with every S&P 500 sector down, with the exception of Utilities. An overriding weight on the market was the broadening expectation of high interest rates for some time. Concerns about how the U.S. consumer will withstand this persistence were reflected in the worst performing S&P sector, Consumer Discretionary. Another negative for many large-cap global companies was the combination of a strong U.S. dollar with struggling overseas economies. The impact of high rates for longer was also evident in the modest downward revisions of forward earnings expectations for 2024 and 2025.

All of this might seem at odds with the surprisingly robust third quarter GDP advance estimate of 4.9%. However, a deeper look at the number produces temperance. For instance, 1.3% of that growth was inventory expansion, a temporary effect, while other elements were more reflective of cost increases exceeding the overall inflation rate. An increase in consumer spending was a major driver of the GDP growth. Cost-sensitive consumers will recognize the inflationary forces behind some of the leading contributors: housing, utilities, health care, food, and insurance. Expectations for the fourth quarter are in the 2% range, which is still higher than expectations from early in 2023 when many were anticipating a late-year recession.

As we look forward through the end of 2023 and into 2024, one positive of the market dip has been an improvement in overall stock market valuation. By month end, the forward one-year P/E ratio for the S&P 500 was 17.1x, which is lower than the 5-year average of 18.7x and the 10-year average of 17.5x. Another measure of corporate health is the year-over-year earnings growth rate. So far, third quarter year-over-year earnings growth has been 2.7%, after little to no earnings growth in Q1 and Q2.

In this month’s Q&A, Tom Tibbles, Head of International Equity, provides insights into the performance of international markets in 2023. He discusses factors influencing their relative strength compared to U.S. markets, strategies for navigating geopolitical risks, and potential opportunities.

“Madison” and/or “Madison Investments” is the unifying tradename of Madison Investment Holdings, Inc., Madison Asset Management, LLC (“MAM”), and Madison Investment Advisors, LLC (“MIA”). MAM and MIA are registered as investment advisers with the U.S. Securities and Exchange Commission. Madison Funds are distributed by MFD Distributor, LLC. MFD Distributor, LLC is registered with the U.S. Securities and Exchange Commission as a broker-dealer and is a member firm of the Financial Industry Regulatory Authority. The home office for each firm listed above is 550 Science Drive, Madison, WI 53711. Madison’s toll-free number is 800-767-0300.

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