While CIO continues to see near-term headwinds for equities, they believe conditions are in place for positive total returns over the next six to 12 months. (ddp)

Of course, investing is not that simple. The recent move in stocks is consistent with our view that investor pessimism had been overdone. While we continue to see near-term headwinds for equities, we believe conditions are in place for positive total returns over the next six to 12 months.

The recent policy meeting of the Federal Reserve suggested that the tightening of financial conditions due to higher bond yields can negate the need for another rate hike. Investors had expected the Fed would refrain from raising rates for a second consecutive time. What was less expected was an explicit mention in the Fed's statement that tightening financial conditions would weigh on economic activity. Some estimates have suggested the rise in bond yields over recent months has been equivalent to around 75 basis points of hiking from the Fed. Since the Fed’s “dot plot” foresaw only one more hike this year, the decision not to raise rates last week is understandable.

The focus on tighter financial conditions suggests the Fed is at least conscious of overtightening. Chair Jerome Powell presumably knew such comments could be perceived as dovish, and the market reaction would ease financial conditions. For the first time since the hiking cycle began in March 2022, we can confidently say the Fed is no longer prioritizing tighter financial conditions to cool the economy, and seemed to welcome some easing. That should qualify as at least a partial policy pivot.

Evidence is mounting the US economy will cool gradually, while avoiding a sharp contraction. The October payrolls reaffirmed that hiring is slowing, to be expected with an economy at full employment. Overall, the data suggest that the labor market is just getting back into balance after post-pandemic dislocations, and not on the cusp of significant weakness. The best evidence for that is weekly initial jobless claims, which remain very low in absolute numbers without any noticeable increase in the past two months. As long as the labor market is strong, consumer spending should remain resilient.

A solid third quarter adds to confidence that the earnings recession is behind us. With the bulk of S&P 500 companies having reported, earnings per share are set to grow for the first time in four quarters. Around 75% of companies are beating profit forecasts. In aggregate, US earnings are beating by 5.5% and corporate profits are on pace to expand by 4%—in line with our initial expectation of 3–4% growth. Although the fourth-quarter S&P 500 earnings estimate has been revised lower, it hasn't deviated substantially from the historical pattern.

So, while we see greater upside in the near term in fixed income, the return outlook for equities is positive, in our view. We believe the relatively benign backdrop for cash, fixed income, stocks, and alternatives makes this an opportune moment to add to diversified balanced portfolios. There was already a case to get portfolios balanced, and the events of last week have only bolstered it. When narratives shift, the market response is often fast and ferocious, with the initial reaction providing the best returns. Balanced portfolios are a very effective way to benefit from these events, and a more reliable strategy than buying the market every 1 November.

For more detail, read Jason Draho's blog November reign .

Main contributors: Solita Marcelli, Mark Haefele, Jason Draho, Vincent Heaney, Christopher Swann, Jennifer Stahmer, Alison Parums

Read the original report: There's more to the rally than seasonality, 7 November 2023.