Not So Spooky

Major stock indices appeared not to have been spooked by the historically volatile months of September and October, continuing their respective advances for the year.

As of filming, the S&P 500, the Dow Jones Dividend Select and the Morgan Stanley All Country World Indices, just to name a few, are all comfortably in double-digit positive territory year to date. Since we last spoke, the Fed commenced, finally, on the highly anticipated path to lower Fed funds rates, cutting by 50 basis points at the Sept. 18 meeting. The other hot topic is, of course, the election.

This will be the last filming before Nov. 5, so this month, let's focus on these two headline-grabbing topics: monetary policy and the election.

As previously stated, the Fed cut the Fed funds rate by 50 basis points in September. City National Rochdale expects an additional 25-50 basis points before year end. We think there's a chance, given the election and the strength of recent economic data, plus slightly higher recent inflation reads, that the Fed could stand pat in November.

Chart 1, 1:23— The pace of further easing is likely to be measured and data driven. Regardless of whether we get one cut or two cuts before year end, a multiyear measured easing cycle should be supportive for the economy and financial markets. Historically, stocks perform better when rate cuts are slow and steady. Such a pace generally suggests a proactive policy rather than one reacting to an economic concern or financial market shock.

Chart 2, 1:52— In other words, it is important to understand why the Fed is cutting. Historically, if cuts are in response to a recession, the S&P 500 performance has been relatively weaker 3, 6 and 12 months after the first rate cut. In periods characterized as normalization, it has performed better. Cuts in response to an emergency measure relatively well because they usually follow a market that has dropped materially.

Shifting to the election. With the days counting down to Nov. 5, polls and prediction markets disagree on the potential outcome. Traditional polling indicates a near-even split with a slight lead to candidate Harris. Prediction markets like Polymarket and Kalshi show candidate Trump leading.

Polymarket has seen a recent large influx in wagers with speculation surrounding a mystery trade betting heavily on Trump. Critics argue that prediction markets are influenced by financial stakes and may not accurately represent voter behavior compared to polls.

The takeaway is that the election forecast is cloudy and uncertain.

Chart 3, 3:00— You will recall multiple references to the three T’s: tariffs, taxes and treasuries. But what can we expect from a macro stock market perspective?

Historically, the S&P 500 has experienced greater uncertainty and volatility in election years. Year to date, we have experienced a strong S&P 500, up more than 20% as of filming, but we have had some volatility.

There was one period at the beginning of the second quarter, another starting in mid-July and then a smaller drop at the beginning of September. Perhaps election uncertainty played some role. However, there were economic and financial factors as well. The key point of this chart is that post-election, the S&P 500 tends to trend back with non-election-year behavior.

Chart 4, 3:49— And most importantly, presidential party control has had less of an impact on the stock market than many think. You've heard us say this many times — corporate profits, interest rates and the direction of monetary policy matter much more.

I look forward to putting those charts into storage until 2028.

We are now entering into the heart of third quarter earnings season, and next month, we'll shift our focus to how earnings season played out, if any revisions are needed to our earnings growth outlook, and importantly, whether there is any impact to the outlook for stocks.