A Look Back at the Third Quarter
On September 16, the Federal Reserve raised interest rates by a quarter point, its first increase since 2023. Inflation has stayed stubbornly above the Fed's 2% target all year, driven in large part by elevated energy prices, and policymakers decided a modest move now was better than waiting. Long-term Treasury yields have since climbed to their highest levels in about two decades, with the 10-year Treasury briefly crossing 5%.
Higher rates are a real headwind for both borrowers and markets, but context matters. Rates are rising because the economy is strong, not because something is breaking. Corporate earnings this year have been exceptional, consumers are still spending, and credit markets show no signs of stress. In other words, the Fed is raising rates in an economy that can handle them.
Encouragingly, market gains are also coming from more places than they were a year ago. For several years, a small group of AI and mega-cap technology companies did most of the heavy lifting. This quarter, cyclical businesses, smaller companies, and international markets have started contributing alongside them. A broader market is generally a healthier market, and it is one of the reasons we have stayed committed to diversified portfolios even when concentrated bets were getting the headlines.
What Matters Most Between Now and Year End
Two things will matter most over the final months of the year. The first is whether inflation data cooperates. The Fed has signaled it may raise rates once more before December, and the incoming numbers will determine whether it follows through. The second is whether companies keep delivering on earnings. Strong profits have been the foundation of this market, and as long as that foundation holds, we believe markets can absorb higher rates.
The Midterm Elections: Volatility Before, Clarity After
With the midterm elections on November 3, it is worth putting the political calendar in perspective. Midterm election years have historically brought above-average volatility, particularly in the months leading up to the vote. Markets dislike uncertainty, and few things create more of it than not knowing who will control the House and Senate. A choppy finish to the year would not be unusual or alarming.
What happens after the election is the more important part of the story. Historically, once the results are confirmed and investors know the balance of power in Washington, markets have tended to move higher. The S&P 500 has posted gains in the twelve months following every midterm election since 1942, with average returns well above a typical year.* Notably, this pattern has held regardless of which party wins. The rally is not about politics; it is about certainty. Once the outcome is known, businesses and investors can plan with greater confidence, and that clarity has historically been rewarded.
History never guarantees future results, and this year's backdrop of rising rates and persistent inflation is different from past cycles. But the pattern is a useful reminder that pre-election turbulence has often been followed by opportunity, and that reacting emotionally to short-term swings can mean missing the recovery that follows.
How We Are Positioning Portfolios
To navigate the months ahead, we will keep portfolios diversified across asset classes, sectors, and geographies. We are also taking advantage of the fact that bonds are finally generating real income again after years of paying very little. Today's higher yields allow fixed income to do what it is supposed to do: provide steady income and a cushion when stocks are volatile.
We are also exploring increased exposure to alternative investments, including private equity, private credit, real estate, and hedge funds, where appropriate for each client's goals and circumstances. These strategies can behave differently from traditional stocks and bonds, adding another layer of diversification to your accounts.
Our Commitment to You
These themes are front and center in our bi-monthly Investment Committee meetings, where we continually evaluate the economic landscape and adjust our approach as conditions change. Our goal remains unchanged: to navigate uncertainty with discipline and deliver a resilient foundation for your long-term wealth.
As always, if you have questions about your portfolio or how these developments may affect your plan, please reach out. We are here to help.
Victor
*Source: Fidelity Institutional Capital Markets Specialist Group