Key Observations
- Donald Trump named 47th President of the United States leading the way to a Republican sweep across the Senate and House of Representatives.
- The Federal Reserve cut rates in September and most recently last week; however, rising inflation concerns and a cooling labor market overshadowed optimism, leading to a cautious market environment in October.
- Despite caution throughout October, year-to-date returns remain strong, highlighting underlying market resilience despite some turbulence leading up to the Presidential Election.
Federal Reserve cuts again, Trump elected President
At the time of writing, the most highly anticipated week in the United States has concluded with Donald Trump being elected the 47th President and the Federal Reserve (‘the Fed”) cutting the Federal Funds rate by 25 basis points. With the Fed enacting its second policy rate cut since March 2020, this decision came amid a robust economic landscape: U.S. GDP expanded at an annualized rate of 2.8% in Q3 2024, and unemployment held steady at 4.1%1. With the 2024 U.S. Presidential winner decided, markets reacted positively on the outlook of reduced regulation and tax cuts. At the same time, however, bond yields also rose on the renewed expectation of a “higher for longer scenario” with interest rates.
While policy decisions remain to be seen, the campaign promise of higher tariffs leave many believing inflation could be reignited. As we’ve witnessed, stickier inflation will cause the Fed to be more cautious in their monetary easing cycle that began in September. Therefore the journey towards the Fed’s 2% inflation target is unlikely to be linear. Additionally, we believe, markets perform best when they understand the current economic risks and have some understanding of what might be to come, and while we now know who the next president will be, there could be continued volatility. The reason for this belief is that when there is a divided government, gridlock provides guardrails on policy changes making outcomes less extreme. With a Republican Party sweep, it is much harder for the market to predict just how far a Trump administration’s latitude will extend.
This current market dichotomy also reflects a unique period where fixed income and equity investors are essentially wagering on different paths for inflation and policy changes. We continue to believe that investors will face a challenging environment in balancing growth opportunities with rate-driven risks. Rather than speculate on future market moves, our focus remains on preparing portfolios for the road ahead through strategic asset allocation and diversified investments designed to be resilient over full market cycles. Ultimately, it is best to ignore the noise and remain invested with an asset allocation that allows you, the client, to handle market volatility and any policy change that might come our way in 2025 and beyond.
Market Recap Through October
While the month of October already feels like a distant memory, financial markets felt a bit of uncertainty leading up to the election and second Fed rate cut decision. Following the Fed’s 50 basis-point rate cut in September, concerns of persistent inflation and a cooling labor market began to overshadow any optimism.
Across the globe, the economic picture appeared equally cloudy. Europe and parts of Asia grappled with softening growth projections, and geopolitical tensions continued to loom large, particularly impacting energy markets and trade dynamics. As supply chains stabilized from pandemic-era disruptions, the threat of renewed volatility remained, casting a long shadow over investor sentiment. All these factors combined to create a cautious atmosphere in the market, leading to a notable downturn in October, despite strong year-to-date gains. The S&P 500 fell by 0.9% in October, reflecting volatility in large-cap stocks amid mixed earnings and geopolitical tensions. Small-cap stocks (the Russell 2000 Index) saw a larger decline of 1.4% during the month. Rising borrowing costs and credit concerns weighed heavily on smaller companies, which are more sensitive to interest rate changes.
The MSCI EAFE Index, which tracks developed markets outside the U.S. and Canada, tumbled 5.4% as economic growth concerns in Europe and Asia weighed on investor confidence. Emerging markets, represented by the MSCI EM Index, weren’t spared either, falling 4.4% in October.
Bond markets struggled amid rising interest rates. The Bloomberg U.S. Aggregate Bond Index posted a 2.5% decline in October, but remains in positive territory year-to-date (+1.9%). Yields rose on concerns of persistent inflation amid strong economic data. High-yield bonds, represented by the Bloomberg U.S. High Yield Corporate Bond Index, fared better than the broader fixed income market due to its lower interest rate sensitivity and higher coupon profile, returning -0.5%. This sector remains up 7.4% year-to-date, as investors sought income in riskier assets despite some jitters in credit markets.
Now, two weeks into November, we have already seen the S&P 500 march higher with a month-to-date return of 4.9% and over 26% for the year. There is certainly a lot that remains on the calendar in 2024 with inflation and jobs numbers along with one more Fed meeting, but we remain optimistic in our belief of building balanced portfolios that provide strong risk adjusted returns with an emphasis on downside protection. Your advisor is always available to have a conversation regarding your goals and objectives as we round out 2024.
1 Source: U.S. Bureaus of Labor Statistics & Economic Analysis. As of October 31, 2024.
Disclosures
The information provided is illustrative and for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. This document may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. Certain targets within the presentation are estimates based on certain assumptions and analysis made by the advisor. There is no guarantee that the estimates will be achieved.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. The principal risks of Clarendon Private’s strategies are disclosed in the publicly available Form ADV Part 2A.
Diversification does not ensure a profit or guarantee against loss. Asset Allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss.
Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income. You cannot invest directly in an Index.
Clarendon Private, LLC (“Clarendon Private”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Clarendon Private and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at www.clarendonprivate.com or the Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov by searching with Clarendon’s CRD # 316616
