What an eventful month November has been! Winter has undoubtedly arrived in the UK, but financial markets have been anything but cold.  Over the course of the month the S&P 500 surgedby an impressive 9.1% while the Bloomberg US Aggregate Bond Index posted a 4.5% return, its largest monthly gain since 1985. November also saw gains in goldwhile TLT, the iShares 20+ Year Treasury Bond ETF, experienced a remarkable double-digit increase. The Santa rally is well and truly underway!

As we reflect on these numbers, we consider the various scenarios that may unfold between now and Christmas, and into the new year. We remain of the view that inflation risks are behind us, and the real risk isdeflation. However, given the strength observed in both bond and equitymarkets, we must ask ourselves what are the key factors investors should consider at this juncture?

Let's start by putting the bond rally into context. In 2008, the 30-year US treasury bond yield reached a peak of 4.79% on June 13th. By December 18th, the 30-year treasury yield bottomed out at 2.53%. During thosesix months, TLT delivered a remarkable 40% return. In contrast, the S&P 500 fell over 30% during the same period, representing a staggering 70% performance differential. Similarly, in March 2020 the 30-year treasury yield plummeted to1%, leading to a 22% rise in TLT between January 1st and March 9th that year.The S&P, on the other hand, fell by 30% over the same period. This context is a healthy reminder that volatility brings opportunity.

At present, 30-year US treasury yields stand at 4.5%. If yieldswere to fall to 1% at any point over the next year, investors would see are markable 90% return on their investment in 30-year treasuries. Whilst it is perhaps unlikely that base rates will drop to 1%, a drop from the current 4.5% yield to, say, 3.5% over the next year, would yield a total return of over 30% in USD terms for the 20y+ Treasury Bond ETF. A 1% fall in yields is an outcome we believe is neither unlikely nor unattractive and this is the asymmetry we look for.

Putting the equity rally into context, the P/E ratio on the- S&P 500 is currently higher than it was when entering 2008 or 2020. The yield curve remains inverted, housing affordability is at its worst in decades,if not ever, and leading indicators persistently point to a weaker economy. Gargantuan government debt levels and an unprecedented rise in the cost-of-capital further contribute to our perspective that the risk-reward ratio in equities is not overly attractive.

On the flip side, liquidity is improving, the US labour market remains robust, and looking at Black Friday sales suggests that the US consumer appears to be in good shape. Another factor to consider, is valuations outside of the so called ‘magnificent seven’. The differential in valuations between US large caps and US small caps (and practically any other region for that matter) is near records highs.

Whether we are in the early stages of a new bull market or witnessing the final stages of the ‘last hurrah’ remains unknown. However, narratives don’t last, volatility will rise again, and with it, opportunities for active asset allocators such as ourselves to profit.

Let’s conclude by revisiting those crucial factors that investors should constantly remind themselves of understand the value of your investments, ensure asymmetry in the expected pay off profile, diversifying away risk, not return, and understanding the role each investment has in your overall portfolio. Add to this a big spoon of cash yielding 5% and some patience, and we would argue the outlook is rather attractive for 2024.

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