In October, both equities and bonds continued to decline in major markets amid hawkish comments from central banks and fears of a full-scale war in the Middle East.
The Federal Reserve kept rates unchanged at 5.25–5.5% but indicated that the U.S. economy is slowing down more slowly than expected, and another rate hike may be possible. This triggered a rise in 10-year Treasury yields to 5% and a correction in equity markets.
In our view, the U.S. labor market has started to cool, as rising rates have finally begun to impact consumption growth and have already led to a significant increase in credit card defaults. Therefore, we expect the Fed to start cutting rates earlier than currently priced in by the market, and Treasury yields to gradually decline.
Based on these forecasts, we recommend increasing the duration of bond portfolios by buying long-term government bonds.
U.S. GDP grew by 4.9% in Q3, but forecasts point to a significant slowdown in growth over the next six months. Europe remains in recession (GDP decline in Germany and minimal growth in France) amid a very weak manufacturing sector. In the U.S., consumption and the services sector are gradually slowing.
Company results showed slowed growth: on average, S&P 500 companies’ revenue and earnings increased by 2% year-over-year, below the annual inflation rate. Many real-economy companies lowered forecasts, which was one of the drivers of stock declines.
After three months of decline, U.S. equity indices are close to fair value; in case of further correction, we recommend buying shares of the largest IT companies, primarily Google and Amazon. After optimizing expenses and investments, these companies are experiencing stable growth in free cash flow.
As we expected, Iran and other Arab states did not launch military actions against Israel despite the start of a ground operation in Gaza. In our view, internal instability in Iran and easing policies on the East by the U.S. and China will keep the region from a full-scale war.
Gold and oil prices rose significantly early in the month on expectations of war escalation and risks of disrupted oil supplies from Arab countries. However, the lack of real actions from Iran and Lebanon showed that the risks were overestimated, leading to a correction in commodity prices.
Overall, we expect moderate growth in equity and bond markets through the end of the year amid declining military risks and no signs of recession risk in the U.S.