Monthly Outlook: October 2026
We wrapped up the third quarter of 2026 with nearly every major stock index still in an uptrend. The S&P500, NASDAQ, the international MSCI EAFE index, and MSCI Emerging index are all above their long-term moving average and so our signals keep us “all in” for growth. We could just stop there and believe that the world is just grand. But there are some weaker undercurrents that we are aware of and are watching carefully.
The S&P500 is comprised of 11 sectors and today, only four of them are still in uptrends while seven have already rolled over to downtrends, triggering our sell signals. Technology, Energy, Healthcare, and Financials are the four sectors that are making all of the gains this year. It’s a little unusual to have such narrow breadth and concentration in so few names. We’ll be watching these four strong sectors to see if they roll over, or if the weaker seven sectors regain strength and begin to trend higher.
Bonds have suffered this year as interest rates have risen. The 10-year US Treasury rate has risen from 4.16% on January 1st to 5.29% today. As a result, medium-term bonds have lost 2.75% in total return, YTD. Long-term bonds have done considerably worse. In our managed portfolios, we sold our long-term bond ETFs and bought very short-term T-bill ETFs back in March to avoid this downtrend. That said, for bond investors buying individual bonds, including muni bonds, these higher rates might offer an interesting buying opportunity if the plan is to hold them for income.
Lastly, there is an undercurrent of very weak “consumer confidence” that seems at odds with the new highs that the broad stock markets are making. Both the Conference Board and Michigan surveys are showing confidence levels that are more in line with recessions, not peaks. If people feel so lousy, why are stock market indexes so strong? We follow the news closely and have come up with five or six factors that might explain the pessimism.
What’s the Concern? A-E-I-O-U, and Sometimes Y
A: Artificial Intelligence. There is no doubt that AI is one of those major breakthroughs that will change our world. Put it in the camp of railroads, electricity, telephone, and the internet. Massive investments are being made in chips, power data centers, applications, and just anything “AI.” Some people are rabidly excited about AI, and others fear that lack of controls could end humanity. On top of it, investors are paying peak prices to get in, and it would be easy to call it an AI bubble, but we won’t.
E: Elections on November 3rd. The midterms are just 34 days away and there is a lot at stake for control of Congress, as well as many local elections for various positions and causes. The outcome will have real impact on policies that affect our day-to-day lives, so they matter a lot. Please vote.
I: Inflation and Interest Rates. The post-COVID stimulus and resulting inflation is proving to be more stubborn than hoped for. Depending on the indictor, inflation is somewhere in the 3%+ range, but feels much higher to many consumers. This is on top of the inflation that has accumulated over the past four years or so. Prices are high, they’re not coming down, and now interest rates are going higher to compound the challenge.
O: Oil Prices and War. Related to inflation concerns, we have ongoing war with Iran and the chokehold on the flow of global oil in the Middle East. Most consumers fill up their vehicle weekly, so this is a constant reminder that life costs more.
U: U.S. Policy. Without being political, policies coming from the White House, Congress, and Federal Reserve have consumers very concerned. Tariffs, wars, fiscal deficits, rising interest rates, and many other political decisions have not been kind to consumers. Enough said.
Y: You. Sometimes, pessimism just feeds on itself and absorbing daily news that is chronically bad can make reality feel worse. Life is still good.
Reconciling Markets & Confidence
As managers, our goal is to invest for growth and income, while always being mindful of risks and the need to reduce losses. Asset prices reflect all of the hope and all of the fear of buyers and sellers, collectively. We find it most profitable, then, to diversify globally, and follow the price trends of each holding. Hope is beating fear today, but we’re watching.