Eaton Vance: The BEAT October 2024

Key Themes for October

Crossing Peak Uncertainty

October represents peak uncertainty. Markets have been wrestling with the start of Fed rate cuts and the U.S. election outcomes of both the president and the makeup of Congress. This uncertainty has led to volatility and wild swings in asset prices. But by early November we will know the results and markets may be relieved of this uncertainty, which could enable prices to trade within a more stable range. Of course, there will always be surprises, but asset allocation decisions can be made with more confidence after we cross this peak uncertainty in October.

Why Did the Fed Start with a 50-Basis Point Cut?

Labor market uncertainty. There are many reasonable explanations that justify starting with a 50-basis point (bp) cut. They range from a “catch-up” cut, regretting they didn’t start in July, to an insurance cut to solidify a soft-landing outcome. However, we are skeptical and think there is more to it. Specifically, we think the Fed may be worried that the labor market – upon which their policy reaction function hinges – is weaker than the data suggests. Note that labor data since the pandemic has been volatile and consistently revised lower, as immigration is one key source of uncertainty. This is just our theory, but something we will be watching closely.

U.S. Elections: What Do We Think We Know?

What candidates say – and how they govern – can be different. The greatest uncertainty surrounds VP Harris. Academic analysis reveals her voting record in the Senate as very progressive and far left, according to Voteview.com. But she promises to govern as a moderate. There is less uncertainty with Trump because he’s been president before. Both candidate’s policies may add to the deficit, but both believe their spending will be paid for: Trump through deregulation and tariffs, Harris through progressive redistributive polices. But what may matter most is the makeup of Congress, which could enable their plans. This is what we are watching most closely.

Is Inflation Really Dead?

Maybe not dead yet, just sleeping. The narrative surrounding the recent Fed cut is that the decline in inflation has given them comfort to lower rates. But it may not be that simple. If we look at other central banks, e.g., the Bank of England, ECB and others, they started cutting rates but then had to slow their planned pace of cuts because inflation proved more stubborn, and the labor market/wages remained sticky stronger. The Fed is set to cut interest rates steadily for the remainder of this year into 2025 and finishing 2026 around 3%. If the U.S. experiences the same as other global economies, then planned Fed cuts may encounter challenges. This is a risk to current lofty asset valuations.

To Read More Click Here