Far be it from me to cry panic, quite the contrary. After all, in a scenario in which the US economy makes a soft landing--which has been our central scenario since the start of the year--and in a context of easing monetary conditions, the markets can have the wind in their sails.

The main risks include volatile US economic data and equally volatile interpretations, the slowdown in the European economy, China’s expectation of fiscal support measures as if they were Godot, geopolitical risks and an election in the US with a totally uncertain outcome.

Knowing the risks and knowing your portfolio is the key. Let’s try to understand them for the market as the year draws to a close.

At the end of the Fed Reserve’s September meeting, the markets were expecting more rate cuts than the Fed. We rightly believed that these expectations were exaggerated. Following the publication of very good job creation figures just over a week ago, the markets revised their expectations downwards and are now in line with the central bank.

Don’t fight the Fed

The saying “don’t fight the Fed” has taken on its full meaning in recent days. John Williams, president of the New York Fed, said last week that the Fed’s September projections were a very good basis, with the economy continuing to grow and inflation returning to 2% (several of his colleagues had a similar message). The Fed seems to be less dependent on economic data, which had hitherto guided its policy, and more confident in its expectations. This should help to calm the bond markets, which have recently been adjusting their rate cut expectations in somewhat brutal 1 percentage point increments.

Now to the question of the 47th presidency of the United States of America. A month after my , we are still no further ahead. For the moment, the uncertainty of the outcome is not panicking the markets. This may presage a degree of volatility as the results come in. But rather than react on the spur of the moment, let’s try to keep our cool by looking ahead to the medium- and long-term outlook.

The only certainty at the moment is that the US budget deficit will widen, whether under Harris (more spending, probably not all of which can be financed with tax hikes) or Trump (less revenue with tax cuts). This could weaken the greenback. We still believe that the greenback will remain moderately bearish because of the rate cuts, its high valuation and a soft landing for the economy. However, the fall should be moderate, as other central banks, such as the European Central Bank, are also cutting their key rates. The other certainty concerns the energy market: green for Harris, fossil for Trump.

Long-term diversification

In Europe, a ‘belt-tightening’ budget in post-Olympic France and a Germany in technical recession is not preventing equities from climbing. For example, the German DAX is at historic highs, despite the sluggish economy, as the ECB is set to cut interest rates. French luxury stocks have rebounded recently on the back of expectations of a recovery in Chinese consumption rather than tax breaks from the new French government. These support measures could also have an impact in the medium term, which we are monitoring closely as we begin to prepare our investment outlook for 2025.

Our asset allocation therefore remains guided by the belief that the most important investment decision is to maintain a diversified portfolio over the long term. Our process is nevertheless dynamic, recognising that market regimes and strategy can undeniably change over time. Our asset allocation is also designed to selectively exploit short-term opportunities. It currently reflects our expectation of a soft landing for the US economy, supported by further cuts in central bank interest rates. In the absence of a recession, history shows that interest rate cuts support equities, so we remain slightly overweight equities relative to bonds.

Finally, our diversification comes from a number of sources: our exposure to fixed income securities, mainly investment-grade bonds, should help in the event of a more severe economic downturn. Bonds may also benefit from lower interest rates. Commodities and gold offer advantages in an uncertain and difficult-to-predict geopolitical environment.

“When will I see you again, wonderful world…”

Nicolas Sopel is head of macro research & chief strategist, Luxembourg, at Quintet Private Bank.

This article was originally published in .