• October under pressure: Markets cooled by rising yields and US election uncertainties
• Solid corporate results, but cautious investors: the US economy faces the challenges of high valuations
• Trump is back and the Fed is adjusting rates: a redefined outlook between growth, inflation, and volatility

The month of October has just ended, and it is fair to describe it as an autumnal month. There has been a cooling off in the markets, the arrival of grey skies, and a decline in investor confidence. The approach of the U.S. elections, accompanied by the uncertainty thereof, was undoubtedly one of the factors contributing to the rise in volatility (VIX index) which increased by more than 6% over the month. Another disrupting factor for equity markets was the sharp rise in sovereign bond yields. This was due to investors’ having fully priced in the scenario of a soft landing for the U.S. economy as well as persistent inflation in certain sectors. In addition, October marked the commencement of the third quarter earnings season in the United States, something which has thus far demonstrated relatively robust figures, affirming the resilience of the U.S. economy and its consumers.

However, given already elevated US equity valuations, investors are now demanding that companies provide forecasts justifying such levels. Companies whose results have failed to meet expectations have been severely punished. In an environment of monetary policy normalization and relatively high valuations in certain sectors, the focus on company fundamentals appears to be taking centre stage; this phenomenon could continue to generate volatility in the coming months.

In October major equity indices suffered declines, with the MSCI World Index, the S&P 500, and the Euro Stoxx 600 dropping by 2%, 0.9%, and 3.3%, respectively. Interest rate sensitive sectors were the most adversely affected, particularly real estate and financials. Conversely, some sectors were able to limit the impact of the decline, notably healthcare and technology. In terms of investment styles, growth stocks outperformed value stocks, and large-cap companies (Mega Caps) outperformed small and mid-cap firms which were negatively impacted by the rise in bond yields.

Regarding fixed income, October saw a general increase in yields across sovereign yield curves in both the United States and Europe. A robust labour market, resilient economic growth, and persistent inflation data prompted investors to adjust their expectations. Consequently, the yield on two-year U.S. Treasury note increased by 53 basis points, reaching 4.17% by the end of the month, while the yield on 10-year Treasury note closed at 4.29% (+50 bps). There was a resurgence of inflation concerns, with the yield on 10-year U.S. Treasury Inflation-Protected Securities (Breakeven) rising by 14 basis points to 2.33%.

As far as commodities are concerned, precious metals continued to demonstrate an upward trajectory during the month despite dollar strength over the period. The price of gold increased by 3.4%, while silver gained 4.3%. As previously stated, the uncertainty surrounding the U.S. elections likely supported demand for these safe-haven assets. Oil also saw a price increase in October, driven by ongoing tensions in the Middle East. The price of WTI crude rose by 2.2%.

Finally, the U.S. dollar saw a gain against its major competitors, with the greenback appreciating 2.3% against the euro and 5.8% against the yen during the month. This followed the electoral defeat of the ruling party in Japan, which had been seen as a contributing factor to the yen's depreciation.

« Red Sweep » in the United States

As I am writing this monthly letter, Donald Trump has just been elected the 47th President of the United States, having surpassed the 270 electoral votes required for victory. The Republican Party has also regained control of the Senate, securing 52 out of 100 seats, and is on track to maintain a majority in the House of Representatives. This Republican success follows an intense election campaign in an increasingly polarised political climate. With the party now in control, significant political changes are expected in the months ahead. One of Trump's primary objectives will be to address the U.S. trade deficit, a significant challenge during Joe Biden's tenure.

Source: NBC News

In September 2024, the deficit reached $85 billion, representing a 19% increase from August and an 11% rise in the year-on-year period with a $70 billion surge. While consumer spending in the United States is a primary driver of this deficit, it also underscores the significant trade imbalance with China and Europe, the two largest U.S. trading partners. To address this issue, Trump plans to implement substantial tariffs.

Mr. Trump's political agenda also includes plans to streamline regulations, implement tax cuts for households, and strengthen immigration controls. While these policies are expected to strengthen the U.S. economy, they are clearly inflationary and less favourable to the rest of the world. The positive effect on financial assets could be considerable, but prudence is advised. The current valuations are based on promises of future outcomes which may prove to be unreliable given the unpredictable nature of Mr Trump's approach.

And at the Same Time the Fed Again Cuts Rates

Unrelated to but in the wake of Trump's election victory, the U.S. Federal Reserve (Fed) acted in line with market expectations, reducing its key interest rate by 25 basis points, bringing it into the range of 4.50% to 4.75%. Fed Chairman Powell commended the resilience of the U.S. economy and acknowledged an easing of the labour market, something which has contributed to a notable decrease in inflation. He, however, declined to comment on the outcome of the election, reiterating the institution's commitment to independence. With the Republican Party now in control and benefiting from a relatively vigorous US economy, bolstered by sustained consumer spending, the Federal Reserve may begin to slow its monetary easing cycle as early as 2025.

Trump's proposed fiscal measures are expected to stimulate growth, but they also carry the risk of driving inflation higher, which could lead to higher interest rates. The current 10-year U.S. Treasury yield of approximately 4.4% indicates a potential revision of inflation expectations. Concurrently, market anticipation of additional rate cuts in the forthcoming year has markedly declined. This shift in sentiment could prompt investors to adopt a more cautious approach once the current level of electoral optimism fades.

Source: Bloomberg / Heritage

Meanwhile, positive sentiment continues to drive U.S. equity markets higher, and other assets as Bitcoin, which recently reached $84,000. It is probable that this sentiment will prevail until the end of the year unless there are significant developments in inflation or the labour market.

But beware of the wake-up call!