October returns were largely negative for the stock and bond market but are still up significantly over the past year. Investors are being barraged with a high level of noise right now but little in terms of sustainable signals. A highly contested US election combined with fluctuations around geopolitical events has investors wondering what the future holds for world diplomacy and global economies. Further, the US Federal Reserve (Fed) began their highly anticipated (and potentially overestimated) rate cutting cycle in September, but investors have been left with more questions as US Treasury rates have risen since the cut announcement. All these uncertainties caused investors to retreat slightly for the month, but the question is whether this is a temporary slide in a continuing bull market or the beginning of a down trend.
In October, GDP for the third quarter showed a still growing and resilient economy. Unemployment data provided some mixed signals. The early October labor data was significantly better than expected but followed by the November 1 report that was worse than expected. We consider the unemployment rate and job growth to be in equilibrium, not as strong as it once was but not weakening into contraction. We believe the most recent report was affected by singular events (hurricane, strikes) and not the start of a significantly deteriorating job market.
Regarding interest rates, the highly anticipated Fed first cut has happened, but the reaction of rising US Treasury rates may have surprised some. In our opinion, the reason for the recent rising rates is based on investors anticipating a much more significant level of cuts than we expected. Economic trends, including jobs and inflation, have gone to more normalized levels but nothing that suggests significant deterioration of economic growth. That has led investors to adjust their expectations of Fed cuts and interest rates rose as a result.
From the stock market, the S&P 500 declined in October but the start to 2024, even after the monthly decline, has been one of the strongest on record. Stock investors have had many different concerns, from geopolitical to economic, but none have led to a sustainable trend to end the bull market rally. It is our opinion that markets can still work upward but expecting the level of growth that we have experienced since 2023 would be overly optimistic.
As we look forward, the election is right around the corner and results will be heavily scrutinized with many knee-jerk reactions that could increase market volatility in the short term. In our opinion, this time should be used for analysis and monitoring rather than emotional short-term trading based on potential policy reactions. At Gradient Investments, we will work to understand companies that benefit versus face a detriment from potential policy actions, but our actions will remain consistent with our investment philosophy – selecting investments based on fundamental opportunity. Buying and selling based on political prediction is not something we look to do with our client assets as we believe, very simply, that portfolios and politics do not mix.
Remember that politics, while influential, should not supersede or override a well-designed and customized investment plan. The plan and execution for retirement assets or legacy planning will likely live through several different elections and a myriad of potential policy changes. History has proven, however, that efficient and adaptable businesses, like many of our US companies we invest in at Gradient, can adjust course as necessary to continue to grow. We believe that trend will persist in the future, and we will continue to invest based on business fundamentals.
