October Portfolio & Market Review

Fortunately, September did not manifest the doom and gloom Wall Street feared as the historically “worst performing month of the year.” 

I covered my caution on the market a few weeks ago, so will not go negative today, but reiterate we are overweight bonds at 40% (Aggressive portfolio), 47% (Moderate portfolio), and 57% (Conservative portfolio). 

The same headwinds I cited last month remain, so I will provide my updates on each:

1. Yields and the global bond market selloff.  The US 10-yr Treasury has risen further, now settling in around 5.30%.  The rate of change was dramatic but hasn’t dampened the stock markets as one would expect (again, a sense of complacency that concerns me).  One positive side to this is the current bond yields have attracted investor demand, establishing a floor to the recent declines.  
2. Iran and inflation.  Yes, our nemesis in so many ways!  I maintain the outlook that major military operations will resume in Iran following the midterm elections.  There is no real negotiating taking place and this uncertainty will lead to either complacency to accept a prolonged engagement, or decisive action to push this to resolution.  The administration has relied on economic pressure and by all accounts, is having the desired effect – except it hasn’t changed Iran’s resolve to hold out.  Secretary Bessent has stated Iran will be financially insolvent in a few weeks as their remaining oil at sea is sold without resupply.  

Inflation numbers from last week showed continued resistance at the 3%/yr level and led to calls for an additional rate hike by the Fed before yearend.  We continue to see that hike occurring in December.  If we do resume military operations in Iran in November, and the Fed raises rates in December, we forecast it will be a positive for the market for 2 reasons:

1. Oil will decline on the expectation that the Strait of Hormuz will be opened, and Iran is not supplying any oil to the market now, so no supply disruption from them, but potentially from others if Iran attacks their facilities.

2. A rate hike will show the bond market the Fed is serious about conquering inflation, thus stabilizing interest rates and likely encouraging a decline in the 10-yr closer to the 5% range.

   3^rd quarter earnings season to begin.  Strong earnings have kept the stock market very resilient in light of the major headwinds discussed.  Expectations for Q3 are very high, as much as 30% growth from last year.  If this comes to pass, it will be extraordinary, indeed.  Our challenge will be if earnings don’t meet expectations.  One barometer of market sentiment is how a stock’s price moves after a report that beats revenue and net income expectations, but falls short in some area, such as the company’s outlook for future earnings.  If the market shrugs off the element(s) of concern and the price moves upward, sentiment is optimistic.  However, if the stock moves down, especially violently, sentiment has turned negative and caution is warranted.