The Markets
 
Financial markets appear to have pre-election jitters.
 
The United States election is less than two weeks away. The candidates are neck and neck. The outcome remains uncertain. And expectations for volatility have been rising, with the CBOE Volatility Index (VIX) finishing last week at 20.33.
 
“When the VIX goes north of 20, Wall Street pays attention because that level signals heightened volatility,” reported Connor Smith of Barron’s.
 
One reason for heightened volatility may be concerns about the election. Ian Salisbury of Barron’s explained, “There are plenty of theories about how particular stocks will fare, depending on next month’s outcome. It isn’t hard to see why. The candidates have tried to curry favor with voters by championing or attacking favored industries, and sometimes individual companies. Vice President Harris has promised to raise the corporate tax rate, a move that could cut into corporate earnings, and Democrats are widely seen as tougher on antitrust issues, a potential hurdle for Wall Street banks looking to capitalize on pent-up [merger and acquisition] activity. Trump, meanwhile, has threatened hefty new tariffs, which could help U.S. manufacturers but hurt multinationals. He’s even threatened individual companies like John Deere over plans to move manufacturing facilities abroad. The good news? Investors can mostly shrug the campaign rhetoric off and focus on stocks’ fundamentals.”
 
So far, third-quarter earnings reports have been strong. Regardless, stock market investors became significantly less bullish last week, according to the AAII Investor Sentiment Survey. The survey asked investors whether they think the stock market will move higher (bullish) or lower (bearish) over the next six months.
 

• Bullish sentiment declined from 45.5 percent the week of October 16 to 37.7 percent last week. (The historic average for bullishness is 37.5 percent.)
• Bearish sentiment increased from 25.4 percent to 29.9 percent. (The historic average for bearishness is 31 percent).
• Neutral sentiment also increased from 29.2 percent to 32.4 percent. (The historic average is 31.5 percent.)

 
Bond investors also have been adjusting their expectations. Since mid-October, the yield on the benchmark 10-year U.S. Treasury note has trended higher. At the start of the month, the 10-year note yielded 3.74 percent. Last week, its yield rose from 4.07 percent to 4.23 percent. 

Ben Levisohn of Barron’s offered some advice to anyone getting swept up in pre-election jitters. “The truth of the matter is that reading the financial market tea leaves is far from straightforward…In fact, investing with your politics is one of the worst ways to lose money—or miss out on gains.” If you have concerns about market volatility or the possible effect of the election on your portfolio, get in touch. We’re happy to talk with you about your concerns and your portfolio.
 
Last week, the S&P 500 Index and Dow Jones Industrial Average moved lower, while the Nasdaq notched a seventh week of gains. Yields on longer maturities of U.S. Treasuries moved higher over the week.

​The Markets
 
Happy birthday!
 
The bull market in stocks charged past its two-year birthday on October 12. “This unique bull market is still young relative to history and, for now, supported by relatively healthy breadth and broadening participation,” wrote Liz Ann Sonders and Kevin Gordon of Schwab.
 
One factor in the U.S. stock market’s rise has been the American economy’s surprising strength as it recovers from a surge in inflation. Our economy is “the envy of the world” and “has left other rich countries in the dust,” reported Simon Rabinovitch and Henry Curr of The Economist. “Expect that to continue,” they wrote.
 
The strength of the U.S. economy was reflected in the release of robust economic data and solid company earnings reports last week. Here’s what happened:
 

• U.S. retail sales grew faster-than-expected in September. Retail sales data show how much Americans spent at food and retail stores. The information is considered to be a leading economic indicator, which means that it provides some insight into what may be ahead for the stock market. Will Kenton of Investopedia explained:

 
“Retail sales is an important indicator that signals either the contraction or expansion of an economy. An increase in retail sales signals a healthy economy that is expanding while a decrease in retail sales signals the opposite. An increase in retail sales usually moves stocks upward and is good for shareholders.”
 

• Third quarter earnings season was off to a good start. At the end of each quarter, publicly traded companies report on sales and profits for the previous quarter. Earnings season has a direct effect on share prices and stock market performance. “…if most companies, particularly the established market leaders, report increasing sales and earnings, traders tend to feel more confident about the market’s prospects. When earnings are trending below expectations, it can be a warning sign of potential trouble ahead,” explained Schwab.

 
At the end of last week, 14 percent of the companies in the Standard & Poor’s 500 Index had reported third-quarter performance. Seventy-nine percent had beaten analysts’ earnings (profit) expectations, and 64 percent had beaten revenue (income) expectations, according to John Butters of FactSet.
 
Major U.S. stock indexes moved higher for the sixth consecutive week, and U.S. Treasury yields finished last week in roughly the same place they ended the week before.

The Markets
 
There was a lot to celebrate last week!
 
The Standard & Poor’s 500 Index closed above 5,800 for the first time—and that’s not all.
 
The Dow Jones Industrial Average also notched a record high last week—and all three major U.S. stock indices ended the first full week of October with gains of more than one percent.
 
There was good economic news, too.
 

• Inflation continued to slow in September. The Consumer Price Index showed headline inflation was 2.4 percent annualized—the smallest annual increase since February 2021. 

 

• Consumers are feeling better than they did a year ago. “[Consumer sentiment] is currently 8 [percent] stronger than a year ago and almost 40 [percent] above the trough reached in June 2022,” reported University of Michigan Surveys of Consumers Director Joanne Hsu.

 

• The economy continues to grow. After inflation, the U.S. economy grew by 3 percent in the second quarter of 2024. Forecasts project that economic growth in the third quarter will be 3.2 percent.

 

• Wages have grown faster than inflation. In September 2024, average hourly earnings were up 4 percent. After inflation, they were up 1.5 percent. Of course, that’s a broad reading for the entire country and may not reflect individual experience.

 
“By just about every measure, the U.S. economy is in good shape. Growth is strong. Unemployment is low. Inflation is back down. More important, many Americans are getting sizable pay raises, and middle-class wealth has surged to record levels. We are living through one of the best economic years of many people’s lifetimes…The United States has nearly 7 million more jobs than it did before the pandemic, and the largest share of 25- to 54-year-olds working since 2001,” reported Heather Long of The Washington Post.
 
It's remarkable that many Americans still don’t recognize the strength of the economy. Last week, a Harvard Caps/Harris Poll found that, “63 [percent] of voters believe the U.S. economy is on the wrong track and 62 [percent] characterize it as weak, consistent with perceptions over the past year.”
 
Last week, major U.S. stock indexes finished higher. U.S. bonds appeared to be headed for a fourth-straight week of declines with the yield on a 10-year note above 4 percent again. 

The Markets
 
Living the realities of risk and reward.
 
Asset allocation is important because it helps investors manage the risk and rewards of investing. In general, investments have different levels of risk and the potential return (or reward) for taking that level of risk is a higher return. For example, investing in stocks typically has greater risk than investing in quality bonds or cash. In return for taking a higher level of risk (i.e., tolerating the ups and downs of the stock market) investors have the potential to earn higher returns. Quality bonds have less risk that stocks and offer lower return potential, and cash/cash equivalents has the least risk and the lowest return potential.
 
During the third quarter of 2024—July through September—the stock market offered a lively ride that demonstrated the concept of risk and reward. Major U.S. stock indices bobbed up and down throughout July before dropping sharply in the first week of August when the July unemployment report lagged expectations. The news caused investors to wonder whether the Fed had waited too long to lower rates, the economy was slowing too quickly, and a recession might be ahead, reported Will Daniel of Fortune via Yahoo!Finance.
 
The stock market rebounded over the remainder of the month as inflation continued to trend lower and economic data remained robust. Then, during the first week of September, the number of new jobs created in August was lower than predicted and investor confidence stumbled again. Uncertainty led to a sharp—and short-lived—decline in stock prices. From that week on, U.S. stock prices trended higher.
 
Over the quarter, the dips and dives of the stock market made many investors’ stomachs drop, but by the end of the quarter, stock prices overall had moved significantly higher. Josh Schafer and Karen Friar of Yahoo!Finance reported:
 
“Wall Street indexes recorded monthly wins to close out the last trading day of September. Notably, the S&P 500 notched its best year-to-date performance at September's end since 1997…Over the last three months, the Dow led the major indexes' gains, up 8.2 [percent]. The S&P gained 5.4 [percent], and the Nasdaq added nearly 3 [percent].”
 
Investors appear to have set aside worries about the U.S. economy and rightfully so, according to Mark Zandi, the chief economist at Moody's Analytics. At the end of September, he wrote:
 
“I've hesitated to say this at the risk of sounding hyperbolic, but with last week’s big GDP revisions, there is no denying it: This is among the best performing economies in my 35+ years as an economist. Economic growth is rip-roaring, with real GDP up 3 [percent] over the past year. Unemployment is low at near 4 [percent], consistent with full employment. Inflation is fast closing in on Fed’s 2 [percent] target—grocery prices, rents and gas prices are flat to down over the past more than a year. Households' financial obligations are light, and set to get lighter with the Fed cutting rates. House prices have never been higher, and most homeowners have more equity in their homes than ever. Corporate profits are robust, and the stock market is hitting a record high on a seemingly daily basis. Of course there are blemishes, as lower-income households are struggling financially, there is a severe shortage of affordable homes, and the government is running large budget deficits. And things could change quickly. There are plenty of threats. But in my time as an economist, the economy has rarely looked better.”
 
Last week, the S&P 500 Index and Dow Jones Industrial Average closed higher after the U.S. employment report showed 254,000 jobs were created in September. That was well above expectations. The number of jobs created in July and August were revised higher, too. Yields on many maturities of U.S. Treasuries moved higher last week.