October Monthly Review

A Look Back

We are going to sneak into November a bit because we can’t ignore the national election that just took place and the resulting outcome. The above title comes from the song made popular by the Rolling Stones. It was actually first released by The Valentinos in 1964, and after Mick Jagger first heard it, they recorded their cover version nine days later. It gave them their first #1 hit in the UK, and stayed in the US top 100 for over 10 weeks. I heard the song on the day after Donald Trump was declared the winner as our next president…and thought it was a pretty appropriate title. It’s over. Whatever your political leaning, I think most of us can admit that there is a big part of us that is just happy that this seemingly endless campaign process is just over. I wasn’t sure if I could take one more day of text/email barrages from both parties attempting to make their case. And, importantly for this setting, we believe financial markets are happy to have certainty. Because of the perceived tightness in the race, the general consensus was that we probably would not know the outcome of the election immediately and that it might take days or longer for clarity. Investors and markets hate uncertainty, perhaps more than anything else. Leading up to the election, most major asset classes were negative in the month of October. Large-Cap US stocks were down almost a percent and International equities were down substantially more. (Developed International -5.44% and Emerging -4.45%) Interestingly, core bonds were negative by almost 2.5%...and this is on the heels of the Fed cutting the short-term Fed Funds rate by .5% in September. The two-year US Treasury yield increased 50 basis points in the month, from 3.65% to 4.15%. For perspective, that is a huge move in that instrument, and especially after the Fed just lowered rates and indicated a continued rate-decreasing path over the next year or so. Many attributed much of that move to the uncertainty of the election…well, that is over now so we will see how that and the rest of the yield curve settles out in time.

A Look Ahead

Again, the election is over and not only will there be a Republican in the White House, but they will also have a majority in the Senate. (We are still waiting for final results in the House of Representatives) It is our belief that as we move beyond the election results, market fundamentals and valuations may again take on their more prominent and historical role. As the emotions start to fade, it will be important to see what the substance will actually turn out to be. I’ve written often about the amazing resilience of our financial markets here in the US. We saw it play out not too long ago as we dealt with a steep stock market sell-off as a result of Covid in 2020, and then the just-as-amazing rally over the next half of the year and into 2021. We are currently at or near all-time highs in most stock indicies. Inflation has been trending lower. Unemployment is still well below 5% nationally. Interest rates are lower…and expected to trend even lower over the next 14 months. The economic soft-landing, which has historically been akin to seeing a unicorn, is certainly in play. And, then there are the things that are harder to calculate. Can we heal as country and become more unified around a common purpose? Can we return to days of reasonable disagreement that is followed by reasonable solutions? It is our belief that we can…and really must, to be the leader of the rest of the world. We remain fairly neutral with a slight overweight to Small-Cap US stocks. The election may be all over now, but the work never really is...