“Something wicked this way comes.” – William Shakespeare, Macbeth (Act 4, Scene 1)
October surprise is a term coined for some nasty gotcha news right before a November election. Key October surprises include the 1980 Iran Hostage Crisis (where the term originated), as well as the 1972 “Peace is at hand” announcement by Kissinger boosting the Nixon campaign. We expect some sort of market-breaking news in the coming weeks, either an announcement of ceasefires in Iran or Russia/Ukraine or equally unflattering breaking news that could further damage the Republican Party as voters start to go to the polls. Whatever breaking news it is, take it with a grain of salt, as many October and pre-election announcements tend to be puffery. October has a history of ugly, rapid drawdowns, including sharp -12% drops on both October 28th and 29th in 1929, the infamous Black Monday -22.6% drop in the Dow on October 1, 1987, the Asian financial crisis with a sharp -7% drop in 1997, and who could forget the nearly -175 drop during the month of October 2008, including sharp -9% and -7.6% single-day moves during the height of the Global Financial Crisis.
But beyond the likelihood of an election surprise or October’s checkered past in the equity markets, I think the real concern lies in the bond markets. After decades of unchecked government spending, are investors finally beginning to take notice of the deteriorating state of federal finances? At this point, getting back to a balanced budget, last done by Clinton in 2001, looks extremely difficult. For the last 25 years, we have been operating at a deficit.
Investors should fear the bond market. After a 40-year bond bull, we now face a different investing environment for fixed income. Instead of a steadily falling yield curve, we could be facing a steadily rising yield curve, meaning you need to completely reevaluate your fixed-income strategy. Citing what has happened in the last decade is no longer relevant. Bonds certainly present an opportunity, but buyers should beware of duration in an era of rising deficits, rising yields, and a market overrun with debt issuance from governments to hyperscalers. Trick or treat for bond investors? Tread carefully.