Stock Markets at Risk After November Surge as Global Recession Looms

Stocks roared higher in November on the hope that central banks are finished raising interest rates. The onset of recession will soon test their resilience.

• Shrugging off would-be risks, stocks are on pace for a blistering rally in this month.
• The end of the global interest rate hike cycle seems to be front and center for traders.
• Before long, global recession will test market resilience as huge debt rollover looms.

November is shaping up as a month of emphatic celebration for financial markets. The bellwether S&P 500 index of U.S. stocks is on pace to finish the month up close to 8%, the best performance since July 2022.

Investors have shrugged off the outbreak of another war in the Middle East and pushed the ongoing conflict in Ukraine to the back burner. Gold has tellingly stalled at the top of a range capping prices for over three years and crude oil is on track for a second consecutive month of losses. This signals markets aren’t worried about contagion risk.

Corporate chaos at OpenAI, the darling of a resurgent tech sector that powered Wall Street for most of the year, was hardly noticed by the Nasdaq. It is aiming to finish November with a gain of over 10%. Even the beaten down Russell 2000, the small-cap equity benchmark weighed down by sickly regional banks, is angling for the biggest rise in five months.

November stock market rally: Its all about the Fed

The expectation that borrowing costs have stopped rising seems to be driving optimism. The markets were seemingly convinced the Federal Reserve is finished with interest rate hikes after the November meeting of the policy-steering Federal Open Markets Committee (FOMC).

Signs of reversal are on display across the rates structure. The benchmark 10-year Treasury bond is poised to end a six-month losing streak. The same story is playing out at the longer end with 30-year paper. At the front end, two-year Treasury notes are trying for the biggest rise since May 2022. Bond prices move inversely of yields.

The threat of losing money on a trade gone wrong is comparatively less worrisome for investors when the cost of capital—the price at which lost money can be replaced—is expected to be lower in the future. That is a tailwind for risk appetite, with traders more willing to position offensively and overlook potential landmines.

Global recession still menaces the markets

Nevertheless, the way forward looks perilous as the calendar turns to 2024. Most worrying of all, the global economy is stalling. Purchasing managers’ index (PMI) data due this week is expected to show the Eurozone economy shrank for a sixth consecutive month. The U.S. is seen growing, but just barely so.

This is a scary prospect at a time when markets must contend with refinancing a historically large pile of private- and public-sector debt at sharply higher interest rates. The Institute of International Finance (IIF) expects the worldwide debt-to-GDP ratio will hit a record 337% this year.

The onset of global recession would diminish this quotient’s “GDP” denominator, driving the debt load higher relative to income and making it more difficult to shoulder. That would still be the case if the numerator stopped growing, but such a prospect at a time of wanton deficit spending seems akin to fantasy. This makes the situation even trickier.

Global financing costs are up by a staggering 500 basis points (bps) on average in less than two years, so rolling over trillions of dollars in debt was going to be difficult under any circumstances. Doing so without the benefit of positive economic growth may mean assets must be sold to raise cash for repayment.

The spectrum of riskier assets is vulnerable in a liquidation scenario, with stock markets front and center. Meanwhile, any scramble for cash is likely to buoy the U.S. dollar.

Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak 

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