This year’s block party was a good one. The weather was perfect, as was the music, with a mix of oldies for the older folks and current hits for the kids. The double dutch team got everyone to jump in and my annual donut-on-a-string contest had several rounds based on age and height. From breakfast bagels to the barbeque lunch to the ice cream truck invited on to the street, the food matched the great vibes. Everyone hung out like old friends, while kids made up games on the street. Not one moment felt like a drag.

So, I couldn’t help but wonder if we’ve peaked in terms of block parties.

And, honestly, I’m wondering the same about the market this year—even despite my call for it to be strong (5,800 on the S&P with a 20% chance of 6,000). As we head into election week, we haven’t seen stock volatility, as measured by the VIX, as elevated as it historically has been. In addition, S&P returns are +7.6% for the last three months vs. the average historical 3 month return leading up to an election of +2.7%.  

Is the market ignoring the election? 

No. It’s just coming out in a different part of the market: bonds.

As shown in the chart below, bond volatility has been on the rise, especially since early October, at a current level of 131, relative to the 3 year average of 115.

It’s also interesting to see the rise in yields on the same timeline (below), relative to a market for election odds for each candidate.

So, why is the bond market reacting to the election?

To me, there’s 3 aspects:

1. Many economists have taken a view that a Trump win (which has recently shown increased odds) could be inflationary—and higher inflation expectations naturally drive yields higher. These include aspects of his stated policy that could impact labor market supply via changes in immigration, and global trade as it relates to expected tariff increases. 

2. A coincidence. Economic data has been pointing to a “soft landing” from a macro perspective, with signs of stable growth and a solid labor market. The Fed’s GDPNow is currently tracking at 2.8% (slightly lower than it had been but solid), while JOLTS employment data was slightly weaker but still good. This all means yields were probably lower than they should have been. We get jobs data on Friday which should be important for yields and stocks. 

And my biggest concern:

3. The albeit slow but rising issue of our nation’s deficit. After all, the debt-to-GDP ratio is expected to be 122% by 2034, up from 99% today. This week, the US Treasury announced their Marketable Borrowing Estimates, expecting to borrow $546B for Q4 and $823B for Q1 2025—a record for Q1. In addition, several treasury auctions have recently come in softer (meaning the yield they had to offer was higher) and our debt ceiling is expiring on December 31. As it relates to the election, it seems that no one in government is as concerned as they should be.

Like with the block party, I’m bracing for the future. I could see volatility rising in the stock market next week, especially after election day. 

That said, the underlying fundamentals of the economy are good, while the earnings season so far is showing growth of about 9% for the quarter vs the 4% expected (about 52% of S&P companies have reported). And over time, it’s earnings growth that matters the most for stocks.

As for the block party, of all the things, it’s the neighbors that matter most for a good time. So another good one is still very possible.