Key Takeaways
1. Investors Experience Another Round of Trade-War Whiplash
President Trump surprised the market by threatening across-the-board 100% tariffs on all Chinese imports, citing retaliation for Beijing’s new rare-earth export controls. The headline caused the S&P 500 to fall more than -2.5% the next day, its steepest drop since April, and sparked a rotation to Treasuries and gold.
Why it matters:
The size and immediacy of the tariffs (Nov. 1 effective date) caught investors off guard and served as a reminder of how quickly policy can change.
2. Market Recovers Losses After Officials Soften Tone
The market recovered some of its losses early in the week after a shift in tone from U.S. officials calmed investor nerves. President Trump posted that “it will all be fine,” while Treasury Secretary Scott Bessent confirmed a Trump-Xi sideline meeting would take place at the APEC summit in late October.
Why it matters:
The de-escalation gave investors something positive to trade on, but until there’s definitive progress, the market is likely to remain highly sensitive to tariff headlines.
3. Consumer Sentiment Remains Weak, But Consumer Actions Tell a Different Story
Consumer sentiment remains weak, but consumer behavior and bank executives tell a different story. The University of Michigan's Consumer Sentiment Index held steady near 55 in October, among the lowest levels in decades. While the survey points to weak consumer sentiment, the first wave of bank earnings points to consumer resilience. Multiple lenders, including JPMorgan Chase, Wells Fargo, and Citi, reported stable spending, solid credit quality, and healthy small business trends. Executives described consumers as financially strong, with delinquency rates steady or better than expected and spending holding up despite higher prices and borrowing costs.
Why it matters:
Consumers may feel gloomy, but their actions tell a different story.
4. Federal Reserve Remains Committed to Rate Cuts
Fed officials delivered their final remarks before the blackout period ahead of the October 30th meeting. The broader message: the Fed remains committed to cutting rates and providing support as the economy cools, but officials are wary of cutting too aggressively without fresh data due to the government shutdown. In his speech, Fed Chair Powell said the labor market has demonstrated significant downside risks, signaling a second consecutive rate cut at the upcoming October meeting.
Why it matters:
Fed officials continue to hint at additional cuts, with the market pricing in two additional 0.25% rate cuts by year-end.
5. AI Remains a Dominant Market Theme, But Investors Turn Cautious
ChatGPT parent OpenAI announced deals with two semiconductor companies to design and manufacture its own computer chips, underscoring the continued surge in AI-infrastructure spending. However, sentiment around the AI trade is showing cracks. A survey of global fund managers found that over half of investors believe AI stocks are in a bubble, a significant shift from earlier in the year.
Why it matters:
While AI continues to drive market leadership and corporate investment, concerns about valuations and profitability suggest investor enthusiasm is becoming more cautious and selective.
At a Glance
Defensive sectors outperformed as market volatility increased, while financials led to the downside due to rising concern over commercial-loan exposures. International stocks outperformed the S&P 500 as the U.S. dollar weakened. In the bond market, Treasury yields fell as the market priced in additional rate cuts, with the 10-year Treasury yield near its lowest levels this year. Longer-maturity bonds outperformed, and high-yield corporate bonds underperformed investment grade. Gold surged to a new high, while crude oil fell over -6% to early 2021 levels.
