In October the broad market started off strongly but rolled over by the end of the month with a loss. The S&P declined 1%. Growth (SPYG) outperformed value (SPYV) with returns of .6% and -1.4% respectively. S&P equal weight (RSP) shed close to 2%, and QQQ dipped around half a percent. Small caps declined around 1.1%, bonds slipped 3% as rates backed up, and the rest of the developed world (CWI) tumbled around 4%.
TWG portfolios outperformed their respective benchmarks before fees, mostly due to avoiding foreign stocks, but still underperformed the broad market due to higher exposure of value stocks or bonds (pending on the portfolio), both of which declined more than the S&P 500 during the second half of the month.
WHAT MOVED MARKETS
Economic data for the first two weeks of October were mixed. Non-farm payrolls for September blew out expectations, with more than 250,000 jobs created vs. 150,000 expected. This surge in jobs caused the unemployment rate to tick lower, a welcoming sign to those concerned about a weakening job market. The following week’s inflation data for September showed a slight increase in prices, confusing the market’s expectations of the pace of future rate cuts. Both data points created some uncertainly about the Fed’s next move – will they continue to lower rates, or take pause given lower concerns about a weak job market and perhaps inflation’s journey to 2%.
Part of the challenge that the market is being faced with is an increase in bond yields, particularly the 10-year US Treasury. To us this makes some sense ahead of the election as the outcome can likely have an impact on future deficits and Federal spending. So rising yields may be a sign of concern about the U.S.’s ability to meet its debt obligations. Or, rising yields could also signal confidence in the future of the U.S. economy given its underlying strength, earnings growth forecasts, a decreasing rate cycle and a strong job market. The bond market will likely resolve this confusion over time.
Third quarter GDP came in at 2.8%, a little less than the 3% expectation, but still solid. Personal consumption index, the Fed’s preferred inflation metric, showed prices grew at 2.2% annualized for the quarter, down from the second quarter’s 2.8% expansion. These two data sets point to inflation’s continued decline while the economy continues to expand, albeit a bit softer than the previous quarter.
PORTFOLIO ADJUSTMENTS
By the end of October, portfolios underwent several changes, notably an increase to the S&P 500 (SPLG), QQQ and RPG (pure growth). Convertibles also became the tactical fixed income position after fully exiting high yield bonds. Mid cap exposure remained stable.
Strategic decisions to increase the allocations to SPLG and QQQ were in response to market dynamics favoring growth stocks, particularly in technology, effectively leveraging market trends for your potential benefit. These adjustments illustrate how careful monitoring, and strategic adjustments can potentially enhance portfolio risk adjusted performance and align with your long-term investment goals.
LOOKING AHEAD
The uncontested election was reflected in a stock market that surged higher in the ensuing days. Financials, industrials and small caps rose higher, while bond prices declined. Clean energy companies were sold, and cyclical stocks were bought.
Market participants are rotating to areas that are perceived to be relieved by less regulation under a Republican government. We were positioned very favorably coming into the election and crushed our benchmarks for the first full week of November. The fact that the election was decided immediately removed a huge element of uncertainty, which would have likely created heightened volatility if the outcome was delayed or contested.
There are a host of favorable variables to suggest the market can advance for the balance of the year including seasonality, a Fed in rate reduction mode, and solid earnings season, all of which support higher stock prices.
By following our objective and price driven process, we remained fully invested during the election season which paid off handsomely during the week following.
We will continue to monitor your portfolios daily and will adjust as necessary to appropriately balance risk and return.
We are grateful to be entrusted to prudently steward your wealth and wish you a wonderful Thanksgiving holiday – we truly do have a lot to be thankful for.
