Equity markets surged and interest rates rose in early November in reaction to former President Donald Trump winning the presidential election and Republicans taking control of the Senate and favored to retain control of the House of Representatives. Markets broadly interpreted the results as positive for economic growth but also as inflationary. Key factors driving the risk-on moves included market expectations that previous tax cuts set for expiration would be extended along and possible further cuts. Markets also expect a lighter regulatory approach and broadly more growth positive policies. Interest rates rose before and after the election on expectations that higher economic growth combined with new tariffs on imported goods would increase inflationary pressures. Expectations that budget deficits would increase also pressured interest rates higher due to concerns over increasing debt levels raising risk premiums embedded Treasuries, and that buyers would demand higher yields to buy the increasing supply of Treasury bonds to fund deficits.

After the election, the U.S. Federal Reserve (Fed) cut its target interest rate by 0.25% as expected. The Fed has now reduced the targeted range for the federal funds rate by 0.75% to a range of 4.5% to 4.75%. Progress in lowering inflation combined with concerns over higher unemployment prompted to the Fed to lower the Fed Funds rate to ease financial conditions. Markets expect the Fed to continue to lower its target rate, but at a much slower pace than previously expected due to stronger than expected growth and a slower and a possibly bumpier path downward for inflation. We expect the Fed to continue to reduce its target rate to a less restrictive level but at a measured pace dependent on incoming economic and inflation data. The Fed also is likely to cut rates less deeply than markets previously expected, stopping at a higher terminal rate.

U.S. stocks fell and government bond yields rose in October as markets factored in stronger-than-expected economic data, uneven inflation and political uncertainty. While the S&P 500^® Index was relatively stable for much of the month, and declined only 0.99% over the period, U.S. Treasury volatility surged as benchmark 10-year yields rose nearly 0.5%.

Economic data released over the month was broadly supportive of the view that the economy and consumer remain resilient. Third quarter gross domestic product (GDP) was estimated at 2.8% quarter-on-quarter. Retail sales were strong, but weaker durable goods orders and signs of slowing activity revealed in the Fed’s Beige Book report on conditions across the country were reminders that the risks of slower growth remain. Third quarter earnings were notably strong in the banking sector, but more mixed in the technology sector. Employment data was mixed and a bit muddled, with 254,000 new jobs created in September, surprising markets that anticipated 100,000 new jobs. That said, October’s employment report revealed a plunge to just 12,000 new jobs, but markets largely discounted that report due to the Boeing strike and particularly impactful hurricanes, both of which pushed that total lower.

Inflation data also was generally supportive of the longer-term trend downward, with the Consumer Price Index (CPI) rising 0.2% in September relative to August, and 2.4% relative to September of last year. While the market was expecting a somewhat smaller (+2.3%) year-on-year increase, the 2.4% figure was the slowest annual increase since 2021. Meanwhile, the Personal Consumption Expenditures (PCE) Price Index saw a decline in its year-on-year rise from 2.3% in August to 2.1% in September. Core PCE, which the Fed targets, was a bit higher at 2.7%, above the Fed’s long-term average annual inflation rate target of 2%.   

The combination of resilient economic growth and expectations that deficit spending would continue—if not rise regardless of who won the election—drove up inflation expectations. Markets continued to expect the Fed to reduce its target interest rate further this year but reduced the number of expected cuts through 2025. At the same time, yields on the benchmark 10-year note surged 47 basis points in October to end the month at 4.28%. While concerns about economic growth and the risk of accelerating inflation slowing the pace of interest rate cuts partly explains the move, uncertainty about post-election fiscal policy also was a factor, which pushed up risk premiums for Treasury rates. The so-called term premium shot up due to concern about possible inflationary policies such as tariffs and a wave of Treasury bond issuance to fund deficits. 

Outlook: We have been and remain of the view that investors are better served by not trying to time the market but instead remain invested with a long-term, fundamentally driven view, adjusting portfolio allocations as longer-term economic, political or other risks ebb and flow. While economic data is often volatile as economies turn—and some of the data suggest the economy is still slowing—the balance continues to indicate growth is stabilizing if not improving.

Lower interest rates, however quickly or slowly they occur, amid already healthy consumption, earnings growth and a stabilizing job market would only help the economy recover. For example, lower interest rates can directly—and quickly—help consumers by lowering the interest payable on borrowing, including credit cards, auto loans and home mortgages. Additionally, lower interest rates could have a significant impact on the more cyclical sectors of the economy such as real estate, industrials and materials.

Over the long term, we generally favor a strategic bias to being overweight equities relative to bonds as we believe investors are rewarded for the additional performance returns equities typically generate relative to fixed-income investments, albeit at a greater level of risk. But in the current environment, we continue to favor a modest overweight to equities. Despite our optimism that the U.S. economy will rebound in the quarters ahead, we think caution is warranted (particularly given current political and geopolitical risks) as we await clearer signs that the economy has sustainably turned the corner. Also, equity valuations appear extended. While valuation is a poor predictor of short-term returns, rich levels can make the market more susceptible to drawdowns given a fundamental trigger, such as softer earnings.

In bond markets, we believe current yields are compelling for long term buy-and-hold strategies for investors seeking income. Additionally, the steady income of bonds and potential for capital appreciation if the economy should weaken more than we expect make them an attractive holding in a diversified portfolio. However, concerns about fiscal policy are likely to remain. As the risk of larger fiscal deficits increases with the length of the loan an investor provides the government (the length of the bond they purchase), upward pressure could remain on longer-dated yields. While we are positioned moderately overweight interest-rate risk (duration), this is focused on shorter-term maturities, which are most impacted by Fed rate cuts.

Drilling down

U.S. stocks wobble

The S&P 500 Index saw a modest correction in October, from 5,762.48 at the September close to 5,705.45 at the end of October, ending the month down 0.99%. The total return of the S&P 500 Index (including dividends) for the month was -0.91%, lowering its year-to-date return to 20.97%.

The NASDAQ Composite Index^® also slipped modestly in October, down 0.52% from 18,189.17 at the end of September to 18,095.15 at the October close. Year to date, the index is up 20.54%.