Monthly Market Report – October 2024

The proximity of the elections in the United States clearly influenced market trends during October. Most polls predicted a victory for Donald Trump, which translated into movements in assets most sensitive to the likely decisions of the Republican candidate.

Fixed income experienced a significant increase in its yield levels, especially for longer maturities. The market perceives that Trump’s victory will lead to higher inflation (due to larger fiscal deficits and tariffs), limiting the Fed’s ability to cut rates. Additionally, positive macroeconomic data reinforced the idea of a soft landing with less need for monetary stimulus. The 10-year U.S. Treasury yield closed the month at 4.28%, marking a 50 basis-point increase from the previous month.

Although Trump’s return to the presidency is the market’s baseline scenario, a Harris victory should not result in significant volatility episodes, at least for equities. As long as neither party secures majorities in both the House and Senate, the market will remain satisfied since its primary concerns are:

• A sharp increase in tariffs by Trump, a measure requiring approval from both chambers.
• A tax hike by Harris, a move that could be blocked without approval from both the House and Senate.

Recent inflation data continues to point to a decline in price levels, especially in Europe. Annual inflation in the eurozone dropped to +1.7% from the previous +2.2%, falling below the ECB's target. Meanwhile, U.S. inflation stood at +2.4%, a tenth above expectations but down from the +2.5% recorded the previous month.

The ECB relied on controlled inflation and weak macroeconomic conditions to cut rates for the third time this year.

The benchmark rate was lowered by 25 basis points to 3.25%, a move fully anticipated by the market. Differences in the macroeconomic outlook between the U.S. and Europe have led to higher expectations of ECB cuts compared to those of the Fed in the coming months.

In the equity market, U.S. indices rallied during the first half of October due to broader gains, allowing the S&P 500 to reach a new all-time high of 5,878 points. However, in the second half of the month, the typical negative seasonality of an election-year October emerged. Market breadth diminished, leaving the “Magnificent Seven” as the sole upward support, a factor insufficient to prevent the S&P 500 from ending the month down -0.99%.

The performance gap between U.S. and European markets continues to widen due to the poor results of European equities in October. The EuroStoxx 50 dropped by -3.46% during the month, bringing its year-to-date return for 2024 to +6.77%, far below the +19.62% posted by the U.S. S&P 500.

By the end of October, six of the "Magnificent Seven" had reported third-quarter 2024 earnings. Overall, results were positive, but some stocks saw significant declines due to weaker profit outlooks driven by increased AI-related spending (notably Microsoft and Meta).

Lastly, geopolitical risk from the Middle East reintroduced episodes of volatility. In early October, Iran attacked Israeli territory by launching 200 ballistic missiles, which were successfully intercepted. The market awaited Israel's retaliation, with speculation about potential oil targets, driving crude prices up by +13% for WTI. The retaliation came during the last weekend of October and was limited to Iranian military targets, which was well-received by the market. This de-escalated the risk event and allowed crude prices to erase all prior gains.