What: With 21 days until the election, it's important to look at what the market is telling us, not what the pundits are telling us.

The Fed cut rates in September, and since then, rates have actually risen. Wait. That’s not what’s supposed to happen, is it?

Long-term government bond Exchange Traded Funds (ETFs), which track the bond market,  reached their highest price in a year and a half just hours before the Fed cut rates. Standard logic says that when rates are cut, when rates go down, the price of bonds go up. However, that is not how markets work. Markets build in all known information. The market knew that the Fed would cut rates leading up to the Fed’s rate cut announcement.

Since the Fed’s rate cut announcement, long-term government bonds have actually fallen by more than 7% (through 10/11/24). This is exactly the opposite of what textbooks say will happen. But this is the reality of the way markets work. If someone bought a long-term bond portfolio, thinking that the rates being cut would improve the price of their bond, they were wrong. In fact, investing in this so-called “safe” investment lost them 7% of their principal in less than a month. The losses in one month are what the bonds would pay in interest over two years.

So What: You may be thinking, thanks for the history lesson, Captain Obvious, but so what?

The price action of bonds, both long and intermediate term high-quality bonds, have continued to decline into October. That means that since the Fed cut rates, rates have been going up in the fixed-income markets. That decline in bond prices signals that the bond market does not believe another rate cut is imminent or simply that the economy is heading into a bad spell. That decline in fixed-income assets also indicates that the bond markets are betting heavily on inflation not being under control.

Now What: Markets tell a story. Our job is to listen. The markets are telling us to be diligent and vigilant about our risk controls relative to US equities, stay away from traditional fixed income, and use alternative fixed income (such as high-yield bonds and senior loans).

We’ll keep you posted as we navigate this together.