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The outlook for the US economy was more upbeat in October than it was in the early summer. Third quarter GDP growth came in at 1.9% — better than the consensus estimate — while third quarter corporate earnings growth for S&P 500 companies exceeded expectations. The domestic economy experienced positive developments in several areas, including encouraging news on the US-China trade friction and a stronger-than-expected October payroll report.

The Federal Reserve (the Fed) played an important accommodative role with a third interest rate cut and the announcement that it was expanding its balance sheet. Risk assets rallied in October, and the major US equity indices have now posted multiple new all-time highs.

We answer two questions in this issue that we believe are top-of-mind for many investors:

  • How does the market perform after an all-time high?
  • How soon after an all-time high does a recession typically occur?

We also address performance by the various asset classes in this issue and conclude with our current tactical asset allocation recommendations based upon macroeconomic factors, investor sentiment, and corporate fundamentals.

Key Takeaways

  • Global Equities: In the US, the Russell 3000 index was up 2.2% in October with small cap equities (+2.6%) slightly outperforming large cap (+2.1%) stocks. Healthcare (+4.8%) and Technology (+4.1%) produced the best sector returns in the month, while Energy (-2.4%) remained in the doldrums. Developed international markets (+3.5%) had a stellar month, outperforming US equities for the second consecutive month. Emerging markets were the strongest regional equity market in October, led by Russia (+8.6%), Taiwan (+7.7%), and Brazil (+6.3%).
  • Fixed Income: US Treasuries were flat for the month: The long bond lost 86 basis points (bps) and the intermediate bond was up 29 bps. Investment-grade corporate bonds (+0.6%) outperformed high yield (+0.3%). All sectors within high yield were positive with the exception of Energy (-2.3%), which was a severe drag on the overall index.
  • Tactical Allocation: We continue to believe that a balanced approach to risk is appropriate despite the market’s newfound animal spirit. As a result, we are maintaining our neutral positioning between stocks and bonds. Over the last few months, our tactical asset allocation model (DART) has been trending in favor of international markets at the expense of the US. We are closely watching these signals but remain ever-so-slightly overweight the US for now. We are also maintaining our defensive tilt within US equities via low-volatility and high-quality exposures.