Monthly portfolio brief

Post-election portfolio positioning

What you need to know

• After a good start to the month, volatility in the final weeks of October led to negative returns for each of our recommended equity asset classes. U.S. election uncertainty and weakness in mega-cap tech stocks weighed on performance.
• With the U.S. presidential election concluding and the economy on strong footing, we believe opportunities are more attractive in equities versus fixed income and U.S. equity markets over international equity markets.
• Healthy economic growth and a potential rebound in manufacturing could support the industrials sector. Consider overweighting industrials while underweighting materials as part of a well-diversified equity portfolio.
• With central banks easing monetary policy, the yield on cash will likely continue to decline in the months ahead. Consider reducing overweight cash positions and adding to intermediate and longer-term bonds.

Portfolio tip

The resilience of the U.S. economy and markets doesn’t change with each election outcome, and neither should your investment strategy. While markets have thus far taken election news in stride, we’d view any future volatility as a compelling opportunity to add to quality investments in line with your long-term goals.

Where have we been?

Despite uncertainty in markets, the U.S. economic growth engine continues to hum along. After brief growth scares in early August and September, recent data suggests the U.S. economy remains on strong footing. Third-quarter real GDP expanded at a healthy 2.8% annualized rate, while recent labor market data points to cooling — but still supportive — conditions.

Strong economic activity has translated into healthy corporate profit growth as well. U.S. large-cap stocks are on pace to post their fifth consecutive quarter of positive earnings growth.

Equities were broadly lower in October, with U.S. stocks outperforming international. U.S. stock market performance has historically been lackluster in the October before a U.S. election, and this month was no exception. Each of our recommended equity asset classes finished lower; however, U.S. equities fared better than international stocks.

In international markets, lackluster economic growth in Europe — combined with a lack of direction from China’s policymakers on future stimulus — weighed on sentiment. A stronger dollar over the course of the month also weighed on international equity performance.

Despite a breather in October, it’s worth acknowledging that each of our recommended equity asset classes has gained over 20% in the past 12 months. Strength across multiple regions has helped lift well-diversified portfolios higher over this time. This highlights the benefits of diversification across multiple asset classes and regions.

Despite easing monetary policy, bond yields rose, weighing on fixed-income returns. Resilient U.S. economic growth has led markets to reduce expectations for Federal Reserve interest rate cuts in 2025. While the expectation is for the Fed to continue lowering rates, markets are now expecting the Fed to cut less over the coming year than was previously anticipated.

In addition, uncertainty over the U.S. debt situation and the election were in the spotlight following a report from the Committee for a Responsible Federal Budget that suggested both candidates’ proposed policies would increase U.S. deficits in the years ahead. Bond yields climbed higher in response, with cash the only fixed-income asset class to post positive returns in October.

What do we recommend going forward?

Revisit what matters most: your goals. The resilience of the U.S. economy and markets doesn’t change with each election, and neither should your investment strategy. Your goals and investment objectives should drive the design of your portfolio. We recommend using our strategic asset allocation guidance as a starting point when building a well-diversified portfolio.

First, define your portfolio’s strategic asset allocation based on your financial goals and comfort with risk. From there, consider incorporating the following opportunistic guidance to take advantage of more timely portfolio opportunities as appropriate with your financial goals.

We continue to recommend favoring U.S. stocks over U.S. investment-grade bonds and international stocks. In our view, easier monetary policy from the Fed and other central banks creates a supportive backdrop for both stocks and bonds. However, based on our view for an ongoing U.S. economic expansion and healthy corporate profit growth, we believe the greater opportunity lies within equities, particularly U.S. large- and mid-cap stocks versus U.S. investment-grade bonds and international stocks.

U.S. large- and mid-cap stocks have outperformed international developed stocks over the past 12 months. Healthy economic growth and moderating inflation have translated into strong corporate profit growth for U.S. large- and mid-cap stocks. This contrasts with regions such as Europe, which have seen lackluster economic and corporate profit growth. Additionally, U.S. large-cap stocks have historically outperformed international developed large-cap stocks in the months following the first Fed rate cut.

Within international equities, we believe the balance of risk and opportunities has improved for emerging-market equities. Policymakers in China announced several stimulus measures to support the country’s slumping economy and stock market. In response, emerging-market stocks rallied more than 6% in September.

While September’s momentum wasn’t sustained last month, and uncertainty remains about the size and timing of future stimulus from China, we believe further policy support will follow. This could provide a boost to emerging-market equities in the months ahead.

Therefore, we recently raised our recommended target for emerging-market equity to neutral and lowered developed international equity to underweight. Given these market dynamics, consider reallocating from U.S. investment-grade bonds and developed international equity to offset an overweight to U.S. large- and mid-cap stocks in your portfolio.

Consider tilting U.S. investment-grade bond allocations toward intermediate- and longer-term bonds. As mentioned, we expect the Fed to continue to lower interest rates over the coming year. In our view, this will lead to limited upward pressure on bond yields from current levels, creating an attractive opportunity for intermediate- and longer-term U.S. investment-grade bonds relative to short-term bonds and cash.

While short-term bonds and cash serve a valuable role in a portfolio, overallocating to them can lead to underperformance over the long term. Despite outperforming in October, cash has been the worst-performing fixed-income asset class over the past 12 months.

With the Fed lowering rates, the yield on cash is likely to fall over the coming months, reducing return potential. We recommend investors consider trimming overweight allocations to cash and short-term bonds and reposition to intermediate- and longer-term bonds, with a focus on seven- to 10-year maturities.

Position equity portfolios to benefit from healthy economic growth and broadening leadership. While equity market performance in 2023 was best characterized as narrowly led, with mega-cap technology stocks outperforming, performance this year has been balanced across sectors. With the Fed easing monetary policy and economic conditions supportive, we expect a continued broadening of leadership in the months ahead, which will benefit investors with diversified equity sector allocations.

Opportunistically, we recommend overweighting industrials while underweighting materials. The industrials sector has posted strong returns year to date and should continue to benefit from healthy economic growth and a potential rebound in manufacturing. Materials has lagged in 2024, and valuations remain elevated compared to history. Additionally, materials is one of just a handful of sectors expected to see negative earnings growth in 2024.

We’ve also recently reduced our recommended target for utilities from overweight to neutral and raised our recommended target for financials from underweight to neutral. Utilities is an interest rate-sensitive sector, and the combination of easing Fed policy and moderating inflation has led to strong returns in 2024. However, the sector has had a strong run already and we’d expect the pace of gains to slow from here.

In financials, we believe ongoing economic resilience, healthy consumer balance sheets and a Fed easing cycle has improved the outlook for this sector.

We’re here for you

Talk with your financial advisor about how our strategic asset allocation guidance can provide a solid foundation for constructing a portfolio aligned to your long-term goals. Then, consider incorporating our opportunistic portfolio guidance to take advantage of current opportunities in markets.

If you don’t have a financial advisor If you don’t have a financial advisor and would like to build an investment strategy aligned to your financial goals, we invite you to meet with an Edward Jones financial advisor.

Strategic portfolio guidance

Defining your strategic investment allocations helps to keep your portfolio aligned with your risk and return objectives, and we recommend taking a diversified approach. Our long-term strategic asset allocation guidance represents our view of balanced diversification for the fixed-income and equity portions of a well-diversified portfolio, based on our outlook for the economy and markets over the next 30 years. The exact weightings (neutral weights) to each asset class will depend on the broad allocation to equity and fixed-income investments that most closely aligns with your comfort with risk and financial goals.

Diversification does not ensure a profit or protect against loss in a declining market.

Opportunistic portfolio guidance

Our opportunistic portfolio guidance represents our timely investment advice based on current market conditions and a shorter-term outlook. We believe incorporating this guidance into a well-diversified portfolio may enhance your potential for greater returns without taking on unintentional risks, helping keep your portfolio aligned with your risk and return objectives. We recommend first considering our opportunistic asset allocation guidance to capture opportunities across asset classes. We then recommend considering opportunistic equity style, U.S. equity sector and U.S. investment-grade bond guidance for more supplemental portfolio positioning, if appropriate.