What mattered in October

The economy: Economic data was limited over the month as a result of the U.S. government shutdown, but the data released was mixed. Manufacturing data remains weak, consumer confidence remains low, inflation remains relatively high but stable (despite tariffs), while reported corporate earnings were strong and private payroll data suggested a slight rebound in employment. The U.S. Federal Reserve (Fed) cut interest rates by 0.25% for the second consecutive month, though it also signaled that the pace of future cuts could be slower than the market had expected. 

Stocks: Despite mid-month corrections — primarily due to trade tensions — October was generally a strong month for stocks, marking the sixth consecutive month that the S&P 500^® Index posted a gain. However, sentiment late in the month turned more cautious amid growing concern about the market’s narrow breadth with returns driven by a few technology and technology-related companies that are richly valued. 

Bonds: Benchmark 10-year Treasury yields remained relatively stable in October, dipping below 4.0% mid-month and ending the month at 4.09%. Meanwhile, shorter-dated Treasury yields rose on expectations that the pace of rate cuts could be slower than anticipated. Investment-grade and high-yield corporate bond yield spreads (the yield paid over comparable Treasuries) widened during the period. The Bloomberg U.S. Aggregate Bond Index rose 0.62% in October, bringing its year-to-date gain to 6.80%.

How it changes our outlook:

The economy: We remain cautious about forecasting significant changes in long-term economic trends based on relatively short-term data, particularly given the suspension of key economic data releases and the distortions policy uncertainty may have had on recent data announcements. The employment market remains a weak point and a cause for concern. Still, we continue to expect the economy will find support in robust corporate earnings, a strong capital investment cycle, tax cuts, deregulation and an expansionary fiscal policy. 

The odds of a recession have risen; however, our base case remains that growth will slow, but the economy will avoid a recession 

Stocks: We maintain a modest overweight position in equities over fixed income given our structurally positive long-term outlook for the economy and our bias toward prioritizing economic fundamentals and corporate earnings as the primary determinants of investment returns over the long term. But valuations are high, and shorter-term volatility could provide attractive opportunities to adjust asset class exposures.  

Maintain exposure, favoring higher-quality and large-cap stocks

Bonds: Interest-rate cuts are increasingly likely to occur incrementally over a longer period than the markets have anticipated. But, as the inflation rate seems increasingly likely to absorb higher tariffs without rising significantly, we expect lower interest rates in the months and quarters ahead. This suggests continuing to favor shorter-maturity Treasury securities. In the corporate credit market, recent credit spread widening supports our bias to favor higher-quality corporate bonds in the current environment with increasing signs of stress in highly leveraged companies. 

Stay at the short end of the Treasury curve and favor higher-quality corporate bonds with less exposure to tariff uncertainty and macroeconomic weakness