Following a poor September, capital markets experienced a strong October. The US Dow Jones Index posted its best October-month ever. Inflation numbers and thus interest rate hikes by central banks continued to take center stage. Fears that aggressive hikes would lead to a recession were mitigated by strong labor statistics, especially in the US.

Value stocks outperformed growth stocks

As far as Q3 earnings were concerned, outcomes were generally better than expected (or feared). However, reports from the largest tech companies were received poorly and October marked the largest stock outperformance for value ahead of growth for a single month in many years.

Further interest rate hikes

Many central banks, including the Federal Reserve and the ECB, lifted rates as inflation continued to be elevated. The so-called pivot (when rate hikes inflect) still seemed some way off, even though a less aggressive hike than expected by the Canadian central bank was seen by investors as a sign of a more dovish direction. However, most analysts believed a more benevolent stance by central banks would not be seen until fund rates were considerably higher than the current levels.

Eight long months of war

The Russian aggression towards Ukraine went into its eighth month. A Ukrainian counter-offensive was met by terror bombings by Russia, targeting civilians and infrastructure objects leading to significant casualties as well as widespread blackouts. At the very end of October, Russia unilaterally decided not to prolong the UN[1]designed export of grain from Ukrainian harbors. The US and the EU continued to show resolve in their support for Ukraine.

Re-election at the Chinese party congress

In China, the 20th communist party congress re-elected President Xi for a third term. Furthermore, the central committee was reshuffled in a way which further consolidated Xi´s power. Investors reacted negatively to what was seen as a further pull-back from market reforms and the Hang Seng index in Hong Kong fell to multiyear lows.

Continued turmoil in the UK

The turmoil in UK politics continued. Liz Truss will go down in history as the most short-lived PM in history (44 days) and was succeeded by former chancellor Rishi Sunak. Determined not to make the same mistake as his predecessor, Mr Sunak pushed his budget announcement into November. The volatile markets for UK currency and bonds thus calmed down.

Energy worries ahead of the winter season

Energy continued to be in focus ahead of the winter season. The Biden administration made additional drawdowns to the Strategic Petroleum Reserves, all in order to mitigate US consumer pain at the gas pumps ahead of the mid-term elections. In Europe, natural gas supplies were sufficiently restored, even though prices were several times higher than in the US. The decision of OPEC+ to cut production by two million barrels per day was condemned by the US. The world index thus increased in October. All sectors posted gains, albeit with great dispersion, with energy being by far the best performer, followed by industrials and financials. At the other end, consumer discretionary and utilities lagged the overall market. As far as regions were concerned, all major regions noted gains with one exception; Hong Kong, which saw its benchmark index fall double digit.

The strong performance in October was a welcome bounce from a tepid third quarter and a rather weak year overall.

“The Presidential cycle effect”?

History shows a surprisingly marked and consistent pattern of weak starts in the midterm election year during a president’s first election period. One explanation could be the rather tense relationship between a new president and a likewise new congress. Both determined to set the political agenda and whereby the congress can make it difficult for the president to be able to deliver on election promises. Promises which could have been good or detrimental to the profitability of public companies. Also, completely new budgets take time to be negotiated and implemented which probably lead to such periods being less fiscally expansionary. Importantly, history also tells us that the period after midterm elections during a president’s first election term is usually very strong for the stock market all the way through to the next the presidential election.

Reasons to think it could be different this time

It would seem then that a promising time is ahead of us. However, unfortunately it could be different on this occasion. The reasons for this are the current strong inflationary environment and the tense, very ideologically competitive atmosphere between the Western democracies on one side and China, Russia and Iran on the other. Our current judgement is that the historical pattern of a period of strength will dominate over current issues. We believe inflation should peak soon and the war in Ukraine does not seem to be spilling over into other countries, at least not yet. The risk for a classic recession is not to be underestimated and the evolution of FED’s interest rate policy to combat inflationary pressure is certainly not completely known, which makes predictions of relative subsector attractiveness and returns quite difficult.