One of the questions I have been getting recently is about the effect of the midterm elections on markets. This is normal. In fact, given the level of partisan rancor—and the number of ads I’ve been seeing on TV—it is surprising that there isn’t more concern around the elections. But with voting just a couple of days away, let’s consider what the elections could mean for our investments.

This will be the second blog post that's come out of my efforts to try to finish my talk for Commonwealth’s National conference. If you remember, in the previous post, the question was whether we were headed back to the 1970s, with all that implies (inflation, stagflation, high unemployment, disco), or back to the 1950s (which, for all its faults, did not have disco).

I am working on my presentation for Commonwealth’s National conference in a couple of weeks (yes, I am late), but I have to admit I am having some trouble telling the story. Over the past several years, I have taken whatever the hot topic of the day was—whether it was globalization, low interest rates, or the pandemic—and tried to put it in a larger context. In other words, to take something fairly isolated as a problem and tie it to everything else as a means of understanding what was likely to happen over the next five years or so. Looking back, I did a pretty good job.

My colleague Sam Millette, manager, fixed income on Commonwealth’s Investment Management and Research team, helped me put together this month’s Market Risk Update. Thanks for the assist, Sam! Let’s take a closer look.

At this point in the year, I really spend some time thinking about what the future holds for the markets and economy. Yes, of course, that is my full-time job. But for most of the year, “the future” consists of the next month or so, the next quarter at most. People need to understand what is happening now and what that means for the next couple of weeks. So, that is what I focus on most of the time. You can see that in this blog and in my monthly market and economic risk updates and videos. What commands the most attention is the now.

Yesterday’s CPI report came in hotter than expected. There had been a general sense that inflation was peaking and that, while it remained high, we were starting to see signs of a sustained downtrend. But the latest report showed that the end of the tunnel is still too far away to see any real light.

My colleague Sam Millette, manager, fixed income on Commonwealth’s Investment Management and Research team, helped me put together this month’s Economic Risk Factor Update. Thanks for the assist, Sam! Let’s take a closer look.

When you look at expectations for corporate earnings for the third quarter, you get a bunch of mixed messages. On one hand, the economy is (supposedly) sinking fast, hit by rate hikes and inflation. More, companies are struggling with the labor shortage, with wages rising sharply and, in many cases, labor simply not available. Between a slower economy and a labor shortage—not to mention the problems created by the strong dollar—you would expect earnings to take a sharp hit. Indeed, we have seen a number of downward revisions to analyst expectations. On the other hand, despite the lower expectations, earnings are in fact still expected to grow, which doesn’t seem consistent with the narrative at the economic level. What’s going on?

An already weak third quarter was capped by a sharp September drop in markets. The S&P 500 lost 9.21 percent for the month and 4.88 percent for the quarter; the Dow Jones Industrial Average dropped 8.76 percent for the month and 6.17 percent for the quarter; and the Nasdaq Composite fell 10.44 percent for the month and 3.91 percent for the quarter. Markets resumed their downward trend in August and September after a bounce early in the quarter. Internationally, we saw the same behavior, with both developed and emerging markets down sharply in September and for the quarter. So, let’s take a look back at what drove these declines and then evaluate what it means going forward.