Equity investors began to see a brighter picture in the month of November. Optimistic market players sent major indices back towards pre-September 11th levels on the hopes of a possible economic recovery in the next six months. With a mixed bag from economic indicators, market players looked towards slight gains in corporate earnings and the success of the war effort in Afghanistan as hopeful signs. Despite the fact that consumers are not fully buying this recovery, market players are hopeful that the coming retail-intensive holiday season will bring customers back into stores. Most of the major indices achieved nice gains throughout the month mostly on the strength of investor-optimism. The Dow neared the 10,000-point level a few times late in the month, but then moved slightly backwards as November ended. The NASDAQ continued its solid performance from last month, as the technology sector gained throughout the month.

Technology and telecommunications companies again paced the economy, as a number of positive earning reports and improved future outlooks sent investors flocking into these sectors. This inevitably leads to gains in the NASDAQ Composite index, and November's performance was no exception. Energy stocks started to see a drop-off as investors ran scared in the wake of lower energy costs and a major bankruptcy reported in the oil industry at the end of November. Health care stocks and the financial sector performed well yet again, while entertainment, leisure and transportation stocks continued their recent downturn. Transportation stocks in the airline industries dominated the negative movers, although the automobile sector performed well for the month. Consumers took advantage of zero-percent financing to boost auto sales for the month, which in turn spread across the retail sector, leading to a positive performance out of retail stocks for November.

Some days of the month were particularly strong, especially in the first few days of November. Market players sent indices rushing forward as early as the 1st of November, which saw a 188-point gain on the Dow. By the third week of November, the holiday week, the Dow was pushing the 10,000-point level while the NASDAQ continued to gain back the momentum it had lost since September 11th. November 6th was also a good day for equity indices as investors received another Fed rate cut. As November drew to a close, markets began to taper off, losing some steam after the Thanksgiving holiday. Market players continue to hope that equities have bottomed out, but the final days of November brought some more negative economic news and a slight sell-off sent indices down from their high levels for the month.

Positive days blew negative days out of the water across equity indices for the month of November. The Dow closed the month with a gain of 8.5 percent, while the NASDAQ outpaced the rest of major indices with a gain of 14.2 percent. The S&P 500 again increased similarly to the Dow, finishing up 7.4 percent for November. The Russell 2000 again gained 5.9 percent, while the market encompassing Wilshire 5000 index increased 5.8 percent in November.

November Treasury Market Overview

Trouble Brewing

Treasury prices declined during most of November, as the strong momentum in the equity markets combined with some mixed economic reports had Treasury market players spooked, despite another Fed rate cut on the 6th. From lower than expected jobless claims to continued strength in the housing market, the positive outlook generated by these indicators exceeded the negative reports on the economy. These negative reports included consumer confidence, which continued to decline and showed that consumers do not feel as excited as market players with regards to the economy. There were also statements from a number of Fed governors and a Fed Beige Book report that signaled more rate cuts from the Fed. Despite this Treasury market-friendly news, Treasury securities traded at much lower prices and higher yields in November.

With the war effort in Afghanistan looking better for the United States, there was less tension among market players, a sign that investors might become less risk-averse. With more signs that the economy may recover in the next six months, the current situation caused Treasury prices to deteriorate. Treasury market investors should continue to worry about these changing attitudes among market players, despite the promise of more rate cuts and the volatile global situation.

As the chart shows, yields all moved up save the 3-month bill, as the trend in the fixed-income market is now negative. A strengthening economy translates into falling bond prices, and rising yields, because it is accompanied by growing borrowing demands. The negative movement in GDP reported on November 30th and rate-cut friendly comments coming from a few Fed governors helped moved yields slightly lower at the end of the month. As a result, the yield curve was slightly lower at the end of the month than on the 15th of the month. Yields were still much higher for the month of November. At the longer end of the curve, the 30-year bond increased 39 basis points in November after reaching its lowest yield since 1993. The 10-year note gained 48 basis points for the month, reversing last month's drop. At the shorter end of the curve, the 5-year note increased by 51 basis points; the 2-year note rose 40 basis points and the 3-month bill moved in the opposite direction, down 25 basis points in November.

Damir Fonovich, Economist, Econoday