October Returns (including dividends):
- S&P 500: +2.3%
- S&P 500 Equal-Weight: -0.9%
- Dow Jones: +2.6%
- Nasdaq: +5.6%
- MSCI EAFE: +1.2%
- MSCI Emerging Markets: +4.2%
- Bonds (US Aggregate): +0.6%
Economic & Policy Highlights
Interest Rates & Fed Outlook
- The Federal Reserve cut rates by 25 basis points to a target range of 3.75 – 4.00%, a move that was well telegraphed
- More importantly, the Fed Chairman warned that a December rate cut “was not a foregone conclusion”
- It was revealed that policymakers have “strongly differing views” on how to proceed
- The US government shutdown resulted in the suspension of most economic releases
- The ECB kept rates steady while the Bank of Canada cut rates
- Elevated inflation remained an issue in the US as well as in Australia, UK, and Japan
Trade & Tariffs
- The US Supreme Court will begin hearing arguments on the Trump Administration’s tariffs in early November
- The US and South Korea reached a trade deal
- The US and China agreed to a 1-year trade truce
- Chinese exports (x-US) hit historic highs
- The US increased sanctions on Russia to curb oil exports
Employment & Growth
- Third quarter US GDP forecast was revised higher to 4.0%, up from 3.8%
- Job growth remained marginally positive, referred to as the “no hire, no fire” economy
- US unemployment remained stable
- The housing market remained frozen as inventories grew but mortgage rates remained above 6%, dramatically affecting affordability
Consumer spending & sentiment
- Consumer sentiment surveys continued to set new lows, reaching levels only seen during recessions and wars.
- Despite weak consumer sentiment, consumer spending remained buoyant thanks to the top 10% of income earners
- Middle- and lower-income consumers continued to pullback spending, focusing largely on essentials.
- Auto loan delinquencies rose for both prime and sub-prime borrowers
Geopolitical Volatility & Energy
- The US Government began a shutdown
- Oil fell 2.2% as OPEC agreed to a modest production hike
- Gold rose 3.7% as central banks continued their purchases
- A ceasefire in Gaza took effect, followed by an historic peace deal brokered by Donald Trump
- Sanae Takaichi became the first woman Prime Minister of Japan
Summary Impact
- Major indices continued their pre-occupation over all things related to AI
- The Federal Reserve appears now more divided over which is the greater threat to the US economy, inflation or jobs
- Stock markets continued to climb but increasingly grew more fragile as fewer stocks pushed indices higher
Commentary:
The month of October was a busy one with most companies reporting their third quarter results, which were generally well received by investors. Markets embraced a potent cocktail (good earning, hopes for rate cuts and heightened AI expectations) pushing indices marginally higher. With the earnings yield now negative for the S&P500, we are entering valuation territory where the odds are beginning to move against equities.
Given that much of the market’s gains have been driven by AI companies and AI-related stocks, we need to remind investors that the history of these massive capital expenditure booms usually doesn’t end well. The 2000 tech bubble and the 2010 shale oil boom experienced large and rapid capex spending which signalled peak optimism, not a new profit cycle. When companies in a specific industry race to outspend each other, the return on each incremental dollar typically declines. Markets reward scarcity.
A final point regarding the market’s AI expectations, is the speed at which the infrastructure can be built and brought on-line. The bottleneck appears to be energy capacity as AI consumes vast amounts of electricity. Data centres can be built quickly but power plants and transmission towers/wires will take much longer to build out. Whether its solar power farms (fastest to build), natural gas fired power plants (2 – 5 years) or nuclear power (10+ years), additional supply of electricity is unlikely to meet current investor expectations.
Despite what appears to be a strong economy on the surface, significant components of the economy have been mired in recession like levels. For example, the US manufacturing sector has been contracting for 34 of the past 36 months. Growth in capital investments by corporations has ground down to zero, outside of spending on computer and electronic equipment.
Valuations remain at lofty levels that will require an almost perfect outcome, with room for error being negligible. While euphoria can continue to push markets higher, they grow more fragile and susceptible to any unexpected shocks.
We continue to find and hold attractively priced companies in all sectors, based on fundamentals. To help protect your capital, we will stick with our disciplined approach and not succumb to the chorus of market cheerleaders promoting investments that are either mispriced or worse, largely based on hopes and dreams.
