What We’re Watching
We just finished a busy October and anticipate an equally news-filled November. Just this past week, the Fed announced the second round of rate cuts, Trump finished his Asia tour in China, and the government shutdown approaches unprecedented new lengths.
Despite all the news, the markets continue to climb to new highs. The S&P 500 is now up 17.5% year-to-date through October 31. Foreign markets, led by the MSCI Emerging Markets are up 33.6%, but with the MSCI EAFE coming in at 27.2% continued their climb, and the Bloomberg Aggregate Bond Index finished the month up 6.8% on the year.
So what’s going on? You can thank earnings for much of the help. While investors are concerned about the lofty valuations in the market (high prices relative to current earnings), the growth in earnings has been better than expected.
Federal Reserve and Monetary Policy
While the Fed did cut rates, it did so with increasingly limited data due to the government shutdown. A reminder that we watch what the Fed will do to short-term interest rates that largely impact savers in money markets and savings and those with variable-rate debt such as credit cards.
The Fed is cutting because they see weakness in the job market, but are hesitant because they do not feel comfortable with persistent 3% inflation. Ultimately, we feel that the Fed will side with policy to support the jobs market (by continuing to lower rates) rather than attempt to fight inflation (by maintaining or increasing rates) that is stubborn and above target, but not “too” high, nor rising too quickly.
Will Inflation Keep Ticking Up?
The biggest question mark on inflation is whether or not we have seen the full impact of the tariffs and the weakening dollar. Up to this point, importers have spared consumers much of the impact of both tariffs and the less valuable dollar which should cause the cost of imported goods to be higher. That is unlikely to continue as companies adjust to the new environment and realign their businesses to profitability.
What’s at Stake in the Supreme Court Case
We will also see a big decision this week from the U.S. Supreme Court on the legality of the tariffs under the International Emergency Economic Powers Act (IEEPA). It is largely assumed that the Trump administration will find workarounds if they happen to lose in court. Nonetheless, it could lead to disruptions and additional market volatility while “Plan B” is digested by the markets.
Trade Truce with China
As expected, China and the U.S. tamped down the ongoing trade war rhetoric and were able to take some positive comments out of Trump’s visit to China. Over the long-term, China is attempting to outrace U.S. technology that they are dependent upon before the U.S. and the West can secure rare earth metals that China possesses. In the meantime, both economies are co-dependent and will continue to cooperate at a base level.
How Long will the Government Shutdown Last?
Let us hope by the time that you are reading this, that the government shutdown will have ended. If not, the length of the shutdown will begin to take on more serious consequences on the broader economy. Federal government workers make up less than 2% of the workforce, but those lost wages will begin to be noticed in the broader economy and particularly areas with large federal employee concentrations like the Washington D.C. area. In addition to those direct impacts, we will begin to see the grind on businesses through their dependency on government services. Many business interactions with the federal government including registrations with the SEC and IRS are at a near standstill.
How do we manage this environment? Uncertain economic conditions coupled with ever higher earnings, driven by technology and AI … it doesn’t just seem like there is a lot going on– there is. So let’s review how we updated Quotient’s Strategic Models and the thinking behind those changes.
Strategic Model Updates
Equity allocations were streamlined to reduce costs, simplify structure, and align more closely with the S&P 500 while maintaining balanced exposure to growth and technology. Broad tech sector tilts were trimmed in favor of a more selective approach to AI-related companies. This is achieved through active strategies targeting AI innovation and anticipated beneficiaries of increased energy demands.
Small-cap exposure was refined toward fundamental, actively managed options, and non‑U.S. equity positions were adjusted to capture currency tailwinds while retaining partial hedging.
Taxable fixed income exposure shifted slightly toward broader, diversified bond exposure with reduced use of dedicated mortgage and short‑term corporate holdings. Duration was fine‑tuned by favoring intermediate rather than long Treasurys to manage interest rate risk efficiently.
Tax‑aware (non-IRA)portfolios mirrored most of the equity adjustments with no changes to the municipal fixed income allocations. As a reminder, taxable accounts are traded carefully depending on each client’s tax circumstance, so in some cases legacy positions may remain for purposes of tax‑efficiency.
Striking the Right Balance
The markets have continued to push ahead over recent years leading some investors to have allocations to stocks at ever higher levels. We will continue to try and find the best balance between keeping up with the tech stocks that have been driving returns and not getting over-exposed in one sector of the economy. This means maintaining international, small cap, and bond allocations and not overweighting technology.
It is important that you take the time to review your allocation and make sure you are taking the appropriate levels of risk. Bonds are yielding higher than inflation for the past few years which is a welcome change over the post-financial crisis time period. This means that reviewing risk and adjusting to your financial plan may be prudent for some investors, particularly retirees.
End of Year Review
Take advantage of the end of year to review your tax situation. If you find you have an overconcentration in a single stock, a sector, or even too much in stock, we have an increasingly widening set of tools to help you de-risk while limiting the tax consequences of divesting.
As we move into the holiday seasons, enjoy family and friends!
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