Rates, Debt, and the Midterms: What’s Driving Q4

Rates, Debt, and the Midterms: What’s Driving Q4

Stocks were modestly lower last week, with the S&P 500 down 0.25% to 7,723 and the Dow off 1.25% to 51,177, while the Nasdaq Composite bucked the trend, up 0.46%. All three remain sol-idly positive for the year, with the S&P 500 up 13.81%, the Nasdaq up 17.52%, and the Dow up 7.76% year-to-date.

Labor Market Softens

September’s labor market data came in soft: nonfarm payrolls rose by just 29,000, well below trend, and the unemployment rate ticked up to 4.2%. Inflation remained sticky, with headline PCE at 3.4% year-over-year and core PCE, the Fed’s preferred gauge, at 3.0%.

Rates Rise, Bonds Fall

The third quarter was defined by the Fed’s first rate hike in three years, alongside growing concerns around federal debt, elevated AI-related debt issuance, and continued uncertainty over the Fed’s path. That combination pushed Treasury yields higher across the curve, with the 10-year ending near 5.28% and the 30-year at 5.63%, driving a roughly 4% sell-off in the Bloomberg U.S. Aggregate Bond Index for the quarter.

Small Caps Take Hit

Small caps were hit particularly hard, falling about 7% in the third quarter, as smaller companies that typically rely on floating-rate debt to fund growth are more exposed to rising financing costs than larger, less leveraged peers.

Commodities Continue Surging

Commodities continued to surge, up roughly 16% for the quarter, as peace negotiations between the U.S. and Iran broke down and oil prices remain elevated relative to both the start of the quarter and the start of the year, even as they’ve been whipsawed by headlines along the way. The dollar was roughly flat for the quarter but remains up nearly 3% for the year, as geopolitical concerns continue to push investors toward safe-haven assets.

Equities Hold Steady

Both U.S. and international equities were little changed during the quarter, which we see as more a reflection of the rapid rise in bond yields weighing on valuations than any breakdown in the underlying earnings picture. Even so, both have posted double-digit gains for the year.

Looking Ahead

Looking ahead to the fourth quarter, we believe the story most likely to dictate markets is the upcoming midterm elections. History suggests markets tend to stabilize once a midterm’s outcome is known, regardless of which party gains or loses seats, which reinforces the importance of staying diversified across public and private markets rather than trying to position around a single election outcome.

As Always

I’d like to leave you with the final line we’ve used since we started these commentaries back at the very height of market volatility in March 2020. Always remember that we create financial/investment plans not for the easy times, but to prepare for the tough ones.