Mercer market review 

Markets can move rapidly and conditions can change based on macro- and micro-economic news and data. At times, it can be difficult to keep up and to determine the important information from the noise.

Our global investments analysts and researchers, and market and asset class specialists, are constantly monitoring markets to identify the most important developments and potential opportunities. 

Our monthly and quarterly insights reports provide a summary of what we believe to be the most significant news points and market movements and attempt to explain them, aiming to keep you on track and informed while still allowing you to keep a focus on the long term.

In October, global equities declined for the third consecutive month. US markets outperformed international developed equities and emerging markets, while growth outperformed value. In general, fixed income also declined in October. Negative market sentiment was driven by increased geopolitical concerns due to the conflict in Israel combined with the continued ‘higher for longer rates’ theme. Yields rose both at the medium and long end of the curve during the month, with the US 10-year yield rising by ~30 basis points in October to 4.9%.

Forward-looking composite purchasing manager indices (PMI) fell into contraction territory in the US due to a weakening in Services. US GDP growth came out strong, at the fastest pace since the 2021 post-COVID ‘reopening’ phase.  Retail sales rose, while nonfarm payrolls came out above expectations. Outside the US, growth was weaker with PMIs in large developed economies still in contractionary territory. In China, third quarter GDP beat market consensus, but the property sector remains a source of weakness.

US headline inflation remained at 3.7% while less cyclical core inflation fell to 4.1%. Core inflation also fell in the UK and Japan but increased in the Eurozone. In China, inflation remained flat. Overall, inflation in the developed world continues to trend downward, but it remains above central bank targets. There is elevated uncertainty around the future path of inflation due to several ongoing conflicts that could impact energy supplies. Central bankers therefore remain in the ‘data-dependent’ mode. We have most likely reached the peak of the hiking cycle in developed countries, but the timing of the next easing cycle is difficult to project. The European Central Bank held rates steady during its October meeting after a 15-month streak of rate hikes. At the end of October, the Bank of Japan announced that it would loosen its yield curve control policy, a step toward exiting its accommodative monetary policy stance.

In terms of geopolitics, conflict has erupted in Israel following surprise attacks by Hamas, with tragic human consequences. The immediate market impact has been limited, with oil initially rising, but finishing the month lower. Gold, which can be seen as a ‘fear gauge’, performed well during the month despite real yields increasing. The election of a new House speaker in the US has removed a source of domestic political uncertainty.

The US dollar continued to strengthen in October, reaching its highest level of the year as investors sought safe haven assets. REITs declined and underperformed broader equities due to rising rates and their cyclical nature.  Commodities had slightly positive returns as weakness in oil was offset in other areas. In a month largely characterised by risk aversion, investors found refuge in gold, safe haven currencies and commodities. 

Global equity markets experienced a decline in the quarter, primarily due to an increase in longer-term rates as markets anticipated a prolonged period of higher rates. Volatility remained low for most of the quarter but rose in the final weeks alongside the spike in rates.

Treasury yields generally rose during the quarter, and the yield curve became less inverted. The 2-year Treasury yield rose 16 bps from 4.9% to 5.0% during Q3, while the 30-year Treasury yield rose 88 bps from 3.8% to 4.7%.  Credit spreads remained relatively stable during the quarter for both investment-grade and high yield bonds.

The Bloomberg Aggregate Bond Index fell 3.2% in Q3, while the MSCI ACWI declined 3.4%. Consequently, a traditional 60/40 portfolio fell 3.3%.  Year-to-date, a 60/40 portfolio has gained 5.6%.