Monthly comment – October 2024

During October, the focus was initially on the earnings season where financials performed well. However, the high degree of uncertainty surrounding the election in the US increasingly led to heightened market volatility, where both sectors and individual stocks were affected by the polls. There were significant differences in currencies as the dollar strengthened against the euro. Geopolitical tensions continued during the month, however without any major impact on the market. October was a tough month for the healthcare sector, especially for the healthcare services sub-sector.

October was marked by a gradual shift in sentiment. Initially, the US labor market accelerated, supporting a soft landing. The 50 basis point rate cut added fuel to interest-sensitive equities. The stock market seemed little influenced by election outcome speculation, geopolitical turmoil or hurricane Milton. Rather, stronger emphasis was put on third quarter earnings. Here, financials performed well. Inflation largely remained in check, and at month close the market priced in a high probability of a 25 basis point rate cut at the next Fed meeting.

However, as an uncertain US election outcome came in focus, market volatility increased, reflecting a growing risk-off sentiment. Increased caution leading up to an election has been a recurring theme and hardly came as a surprise. Sectors and single stocks were increasingly categorized as winners or losers depending on election outcomes. The same categorization was also seen in healthcare, most notably within hospitals and managed care. The world index and S&P 500 were both down by 2.0 percent and 1.0 percent respectively, measured in US dollars. However, the performance varies significantly depending on investors’ base currency. In October the US dollar strengthened by more than 2 percent against the Euro.

The finish line draws near for the US election

It may take several days to reach an outcome, particularly regarding the division of power between the White House and the two Chambers of Congress. The October polls indicated a somewhat favorable momentum for Trump given an advantage in the swing state Pennsylvania. However, the race remained very close and polling results were well within the margin of error. A similar pattern was also true for the other six swing states likely to sway the result in either candidate’s favor. As for the Senate, the Republicans appeared to have an edge whereas the House remained more uncertain. To add further uncertainty, all the polls struggled with the issue of accurate representation given the low number of survey respondents.

 Geopolitical tensions and focus on internal markets

Stock markets were little impacted by the multiple ongoing major conflicts, apart from the Israel-Iran conflict which posed risks to oil supply that were difficult to fully assess. Deglobalization themes resurfaced, as exemplified by Trump’s campaign to impose significant additional tariffs on goods. Similarly, the EU imposed duties on Chinese electric vehicles. China continued initiatives to revive its national economy with a lessened priority for increased imports.

Relections from the managers

October was a difficult month for the healthcare sector. From our perspective, we saw several events which could be interpreted as negative in the short term. Nevertheless, almost none of these events gave us reason to re-allocate in the portfolio. What seemed to be needed was a correction of expectations, and what we saw was short-term declines, with some expected positive developments being deferred to the future and/or that the risk/reward was seen as being less favorable. This type of situation is especially common during the fall, when the outline for the coming year is becoming clearer and more defined.

High level of political uncertainty

The election of a new US president and the likely shifts in the balance of power in Congress accentuated the sense of uncertainty. The level of political uncertainty is seen as being particularly high in this election. However, we know from history that the perception of risks often becomes magnified at times of elections. Many US election observers are tempted to provide forecasts of the political landscape we will see during the coming four years. However, this is often done without sufficient consideration being given to the fact that presidents do not always get a mandate to run policy which is based entirely on their own political agenda. It is easy for observers to underestimate or even overlook the dependence on the Congress, the many different interest groups within the parties, business stakeholders, trade partners and geopolitical adversaries. In fact, presidents on their own can accomplish relatively little. On top of that, there are only two years until the next (midterm) election.

Important issues that may arise for the incoming president include taxes, tariffs, support to Ukraine, the Mexican border, reshoring of industry/production, as well as the budgeting and detailed regulation of Medicare and Medicaid. Minorities within each party can cause unexpected twists in such budget negotiations.

Many realities will restrict the upcoming power constellation in Washington. The budget is unlikely to become much more expansive without pushing interest rates and thus worsening conditions for the economy. Neither can the US reduce NATOs resources, mandates or budget without diminishing its own geopolitical influence and long-term strategic ability in other parts of the world. This is hardly the ambition of either the Democrats or the Republicans. Major changes in discretionary spending on social programs are likely to be difficult to carry out in the near future since new methods for dimensioning spending supported by both parties would be needed. We therefore believe that there will be an evolution rather than a revolution when it comes to US politics, both when it comes to domestic and foreign policy. In such an environment, the healthcare sector should be able to get some “peace and quiet”, however potential political initiatives could be cause for a degree of uncertainty. As we have mentioned many times before, we live in exciting times and a great deal of surprises can happen. Time will tell.