Yielding The High Ground

November 7, 2024

October ended with a downturn for the major indices, which were spooked by mixed corporate earnings, increasing bond yields, and the looming presidential election. The S&P500 gave back modest ground during the month, losing -0.92% during the period to close at 5,705. Small capitalization stocks fared even worse, losing -2.6% while correlating strongly with higher interest rates. As economic data continue to come in strong, rates have risen accordingly, and small caps have struggled. October concluded with sharp losses and pounded nails in the winning streak coffins: it was the first negative month since July for the NASDAQ and both the Dow and S&P500 had five-month positive streaks snapped. Boo-hoo.

Volatility increased markedly during October, as investors jockeyed to position portfolios ahead of the presidential election. Rates and bond markets showed the highest relative volatility, as yields have surged on the back of inflationary campaign rhetoric and decreased expectations for future rate cuts. During the month, yields across the curve backed up around 0.5% depending on the precise maturity. This put pressure on bond prices and resulted in losses across all the major bond indices. During the 1.5 months since the Fed began the easing cycle, economic data have continued to come in strong and cast doubts over how many cuts that the market has priced in. Stuck between a rock and a hard place, Chair Powell has his work cut out for him if he is to deliver on both amount and size of market expectations.

Powerful headwinds to lower future interest rates have come in the form of ongoing economic strength, minor but sticky inflation, and a sustained low unemployment rate. None of the October data contradicted these points:

October payrolls were weak (+12K jobs created) but resulted in no change to the unemployment rate
September inflation came in slightly hotter than anticipated (0.2% monthly versus 0.1% expected)
Headline GDP came in slightly weaker (2.8%) but personal consumption, which accounts for 2/3 of the economy, came in at a strong +3.7%

In keeping with the above, the Federal Open Market Committee is widely expected to reduce its target Federal Funds Rate when it meets November 7^th, most likely by 0.25%. Nevertheless, investors have clearly recalibrated their thinking relative to how aggressive the central bank will be in cutting rates over the next cycle. Accordingly, we expect volatility to remain elevated in the near term.

Gold and other precious metals continue to grab headlines as their blistering rallies continue. Physical gold rose +4.2% during the month and hit multiple all-time highs after storming nearly 6% higher in September. While we have seen furious demand on the part of global governments and central banks, recently we have seen a safe-haven trend emerge ahead of the election, which still appears too close to call. Gold is up an incredible 33% this year, arguably sparking even more demand and resulting in an upward, virtuous cycle. Moving forward, potential tailwinds for gold and metals include global monetary easing, sticky inflation, increased fiscal imbalances (deficits), associated dollar debasement, and geopolitical conflict. Not to mention the ever-present FOMO!

As of this writing, we are less than 24 hours until Election Day. Naturally, there is a lot of political noise dominating the landscape. While we would not be surprised to see heightened volatility in the immediate aftermath of the election, we do recognize that markets tend to look through elections to quickly and efficiently price in any major policy implications. And the further we travel away from the big day, the smoother the ride tends to be for both stocks and bonds. We rest assured knowing that time is the great equalizer.

Outside of the election, the economic data continue to point to a soft landing with no recession. The Fed is telegraphing that it intends to continue its loosening policy, outside of major dislocations in terms of employment and/or inflation. It is widely expected that the bank will cut interest rates a further 0.25% while awaiting crucial economic data before the final December meeting. From a seasonal perspective, November has been the best month for stocks over the last decade and has posted an average return of 3.81%. Not shabby. Either way, November 2024 will likely be an epic month in many regards, and we stand watchful with our investment processes firmly in place.

We wish you a very early Happy Thanksgiving and as ever, we thank you for your ongoing trust and support.

Sincerely,

Jason D. Edinger

Chief Investment Officer

Boston Wealth Strategies