The tug of war between bulls and bears continued during the month of October. Fueled by a still strong jobs market and resilient consumer spending, the U.S. economy sustained its leadership position in global growth. This reality caused markets to increasingly price in the Fed’s ‘higher-for-longer mantra’, although there’s little question that Washington’s relentless bill and coupon issuance has played a significant role in pressing longer term yields higher; another fact not helpful for stocks last month.
Clearly equity prices have finally begun to be impacted by the inevitable and now relentless climb in interest rates. The current questions are whether stocks and bonds are fairly priced and how long before interest rates decline from their two-decade highs. This note will include thoughts on these issues, but first let’s discuss the performance of our funds and the attribution across the broader markets.
As we’ve often remarked, history rhymes but doesn’t repeat and sure enough, once again, markets remain convinced that the ‘song will remain the same’ this cycle. While both stocks and bonds ‘took it on the chin’ during August until the end of month rally, markets view recent evidence of a softening labour market as a precursor to Fed rate cuts during 2024. At this juncture, this scenario remains a high probability. The questions remain around the timing and extent of rate cuts, the cadence and composition of economic growth, and the subsequent impact on corporate profits and valuation of stocks. This note will delve into these questions, but first let’s recap the performance of our funds.
Equities continued to march higher during July as investors became increasingly confident that the forward macro environment would unfold in a manner helpful to stocks. From the Fed shifting its economic outlook to merely a “noticeable slowdown” from a recession to the extrapolation of the recent dovish news on the inflation front affirming big cuts in interest rates next year, the now 4+ month rally in risk assets was maintained. As can be seen from the far-right of the below relative strength graph of growth vs. value, July’s performance exhibited a more equal balance between growth and value indices.