Mind The Gap
While your neighbors’ Christmas lights may be bright and orderly, November returns in equities and fixed income were a much more disparate collection of indicators. Domestic equities returned +.25% and –1.45% as tracked by the S&P 500 Index and the NASDAQ Index, respectively. The S&P 500 Index is less heavily constituted of the mega-cap tech names that Nasdaq is and, instead, includes greater allocations to some more defensive sectors like utilities and healthcare. In this case, the broader diversification has worked in its favor. International equities moved loosely in tandem with domestics. International developed markets returned +.65% as tracked by MSCI EAFE Index and emerging markets returned -2.38% as tracked by the MSCI Emerging Markets Index.
November was a month with marked volatility and, as such, equity returns displayed some inconsistencies. Equities responded negatively to the longest government shutdown in history ending on November 12th. Likely because it ended the 43-day blackout period and investors were suddenly supplied with a more complete picture of the true state of the economy. In addition, October ended with strong year-to-date equity numbers, so part of November’s early fall and increased volatility could be due to that lofty start.
Equities outside of the technology sector have struggled to keep pace with those propped up by Artificial Intelligence (AI) which makes earnings quality a growing priority because so many companies are taking on more debt to invest in AI. The increase in debt stands to be adverse in implication if companies become overleveraged- which is a problem that segues directly into the emerging issues in private credit. Private credit, and access to vehicles that can offer exposure, has significantly grown in popularity throughout the last year.1
Unfortunately, the growth hasn’t come without friction. Default rates in private credit have sat below the default rates for syndicated loans and high yield bonds for some time. However, with the recent increase in borrowing that gap is expected to narrow.2 Some default risk is presently at bay as several of these private credit vehicles are exercising an “extend-and-pretend” approach to their interest payments.3 Unfortunately, it goes without saying that can only last so long before lenders start knocking. This is the delicate road to which private credit and quasi-private credit vehicles are making an overture.
As for public credit, performance was relatively flat for the month, with the Bloomberg U.S. Aggregate Total Return Value Unhedged Index closing at +.62%. Movement in spreads and yields may develop as the final Federal Reserve meeting of the year draws near. Investors are currently pricing in an additional rate cut for this final meeting according to Bloomberg’s World Interest Rate Probability Function (WIRP). Credit spreads remain near historic lows and yields have continued to come down. The US 10-year treasury yield slipped below 4%, indicating decreasing consumer sentiment, though this conflicts with the increasing consumer confidence that’s represented by the continued return to a normal yield curve environment.
As the year closes, both equity and debt markets have potential to be influenced by any movement (or lack of movement) in interest rates. The resolve that came November 12 ending the longest government shutdown in history, extended government funding through January 30. If a more permanent resolve is not found by that time, it is expected that the government could shut down again. This is impactful to investors as these shutdowns are blackout periods for the major data points that investors use to know where the economy stands. And the result of the pressure building in segments of the direct lending market remains to be seen.
Hazel Allen
Portfolio Management Analyst
1https://www.morganstanley.com/ideas/private-credit-outlook-considerations
Published October 3, 2025; Accessed December 1, 2025
2https://alternativecreditinvestor.com/2025/11/25/defaults-set-to-rise-as-mid-market-faces-force-of-reckoning Published November 25, 2025; Accessed December 1, 2025
3https://fortune.com/2025/11/21/private-credit-bad-piks-cracks-in-the-market;
Published November 21, 2025; Accessed December 1, 2025
The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices.
The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market and it is highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies.
Bloomberg U.S. Aggregate Total Return Value Unhedged Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Th index includes Treasuries, government-related and corporate securities, MBS(agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).
Earnings quality, also known as quality of earnings, in accounting, refers to the ability of reported earnings to predict a company's future cash flows.
The MSCI EAFE Index (Europe, Australasia, Far East) is an unmanaged free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada.
The MSCI Emerging Markets Index consists of 23 economies including Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and the United Arab Emirates. The MSCI is a float-adjusted market capitalization index.
A syndicated loan is a large loan provided by a group of lenders, known as a syndicate, to a single borrower to spread the risk and meet financial needs too large for one institution.
High-yield bonds, also called junk bonds, are corporate debt with credit ratings below investment grade, issued by companies that carry a higher risk of default. To compensate investors for this increased risk, these bonds offer higher interest rates, or yields, than investment-grade bonds.
Bloomberg's World Interest Rate Probability(WIRP) function is a chart that shows the probability of different interest rates for the US benchmark rate. The chart is based on interest rate caps and floors, as well as options on Treasury futures.
The 10-year Treasury note is a debt obligation issued by the United States government with a maturity of 10 years upon initial issuance. A 10-year Treasury note pays interest at a fixed rate once every six months, and pays the face value to the holder at maturity.
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