Managing Expectations

By Aoifinn Devitt, CFP® – Chief Investment Officer

October turned out to be a little spooky after all.  The month launched somewhat unsteadily, reeling from a “September effect” which did exactly what it said on the tin (markets were negative).  Uncertainties were then amplified on October 7 by the attacks on Israel and a devastating escalation of hostilities in the region. Markets were subsequently whipsawed around for much of the period and ended down slightly, although the month itself felt a lot more volatile. The year-to-date performance is now less than 10% for the S&P following a month of October that saw returns of -1.24% ( -6.7% for the past three months). Nasdaq shed 2.25% for the month (-7.4% for the past three months), while European stocks were broadly flat.  At this stage only the continental European DAX is up for the year with the FTSE flat to slightly negative (-1.44%). In Asia there was savage performance in Hong Kong (-12.38% in the three-month period bringing year to date to -13.55%) while Japan remains a relative darling of the region – up 21% year to date, and actually positive in the past month.  Even China is in better shape than Hong Kong – and is only off 2% year to date in the Shanghai Comp and -7% for the past three months. This comes at a time that pundits are advising that lower growth is the “new normal” for China, while Japan is finally seeing (and celebrating) some modest inflation for the first time in decades.

Source: Morningstar as of 11/2/2023


There continues to be a rash of somewhat conflicting data circulating – decent corporate earnings were punished for falling short of every last expectation – particularly for tech stocks. Meanwhile job openings are creeping up, demand for labor is still high but there seems to be less concern about inflation. Construction spending is on the rise for the ninth month in a row, flying in the face of expected softening due to high mortgage rates and consumer spending remains supported. Some cracks are appearing, however, in areas such as international travel and cruises as concern about Middle Eastern tensions rattle travelers.

The Fed decided to hold on interest rates on November 1 – which was matched by the Bank of England in its decision one day later. European inflation fell to its lowest level in two years, suggesting that rates there could take a breather too.  Although the Fed’s inaction was broadly anticipated it had an interesting effect on investors used to parsing every word uttered by Chairman Powell.  It seems, just in the past few days, that expectations of just how “long” is “longer” (as in “higher rates for longer”) is likely to have shifted.  There is a saying that “a week is a long time in politics” and we might also say the same for bond markets. While last week bond yields were riding high, we have just seen the greatest fall in the US 10-year yield since the banking crisis in the Spring.

We welcome this consolidation in bond prices, as we are mindful that investors had been enthusiastically buying bonds focused on the yields, only to be rocked by principal erosion as those yields moved even higher. A period of stabilization – congruent with the Fed’s watchful waiting of data and the economy’s health – would allow fixed income to do what it says on the tin and act as ballast in the portfolio.


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