October Overview
October was a volatile month for markets, with equities and bonds moving lower. The US election and the potential implications of a policy shift on inflation and interest rates caused global uncertainty.
Here in the UK the first Labour budget in 15 years caused market paralysis as investors tried to forecast what Chancellor Rachel Reeves would do. All eyes remain on macro economics and the direction of interest rates and inflation.
The US has been the bellwether for financial markets and investors were firmly fixed on its inflation data. The September CPI report indicated that inflation eased by less than expected, however, core inflation remained elevated at 3.3%, driven by rising costs in medical care, auto insurance and airline fares.
Following the Fed’s 50 basis point interest rate cut in September, the sticky core inflation reading highlighted the challenge facing US policymakers if they are to achieve their dual mandate of maintaining a solid labour market alongside price stability. Rate cuts are still expected in November and potentially December, but a strong labour market and resilient inflation has reduced the likelihood of a 50 basis point cut at either of these meetings.
Its fair to say cooling in rate cut expectations, alongside election uncertainty unnerved equity and bond investors. In the UK, the labour market remains tight, with the unemployment rate falling to 4.0% and pay growth remaining high at 4.9% in August. Despite this, September’s headline inflation declined significantly to 1.7%, with core inflation at 3.2%.
At the end of October we also had the UK budget and these policy announcements put pressure on the UK Gilt market due to stronger-than-expected levels of spending now planned for 2025. Gilts were an under-performer on the month, ending the month with a return of -2.8%.
Turning to equity markets
As we turn to equity markets we see that developed market equities posted a negative return of 2.0%. Japanese stocks were the top performer despite concerns that the need for tighter policy and a stronger yen could impact export-oriented companies, as well as political uncertainty created by recent election results. Third quarter earnings season began in the US with strong results from the banking sector.
Guidance was more mixed for tech companies, particularly on semiconductor demand, which added to market volatility. Generally, positive earnings surprises were among the LOWEST of recent quarters, highlighting some decline in earnings momentum, which in turn added to the downward pressures in equity prices. Emerging markets declined by 4.3%, pressured by a strong US dollar, profit taking in India and volatility in Chinese equity markets due to uncertainty over the efficency of the support measures announced in September.
Growth stocks outperformed their value counterparts, but fell 1.8% on the month. Small caps retraced by 2.7%, as slowing economic momentum continued to weigh on sentiment. The global government bond index fell 3.7%, highlighting uncertainty over the trajectory of global interest rate cutting cycles. This trend also reflects the impact of a strong US dollar and uncertainty around the US elections and subsequent policies, however, investors should remember that historically, the start of rate cutting cycles has often resulted in significant returns for government bond markets in the subsequent years.
Here at Progeny
Recession risks remained a key concern. however, our base case of a soft landing scenario with falling inflation and interest rates is still in place. We continue to believe in a broadening of returns across various asset classes and that returns could shift from the concentration in Big Tech to other sectors and stocks.
Fixed income markets are likely to experience further volatility until the path for rate cuts becomes clearer, though historically, falling rates have boosted government bond returns. The US presidential election and potential policy changes are a source of uncertainty and have already contributed to the move higher in bond yields. Balanced and diversified portfolios, combining equities with quality fixed income, can help navigate this uncertainty. Adding alternatives may also provide a hedge against unpredictable inflation bumps.
If you have any concerns about the current financial market and need to seek guidance on your investments, please contact our team today.
Important Note
The information contained within this document is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK.
This article is distributed for educational purposes only and should not be considered financial advice.
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The opinions stated in this document are those of the author and do not necessarily represent the view of Progeny and should not be relied upon to make a financial decision.
Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
If you are unsure about the suitability or otherwise of any product or service, we recommend that you seek professional advice.
Past performance is no guarantee of future performance.
The value of an investment and the income from it can fall as well as rise and investors may get back less than they invested. Your capital is therefore always at risk. It should be noted that stock market investing is intended for the longer term.
