The past week brought developments with both immediate and longer-term consequences. The midterm results, a sharp technology selloff, and a drop in oil prices moved markets quickly. The bigger questions are how a divided Washington will govern, whether energy costs will ease, and how much AI spending will translate into profits. I’ve pulled together observations from several of the money managers we work with and added my own perspective on what matters most for our clients.
The election and the cost of living
Democrats won control of both chambers of Congress in a sweeping midterm victory. Texas stood out. James Talarico became the first Democrat in more than 30 years to win statewide office there, and Democrats also took control of the Texas House. The president’s party often loses ground in midterms, but the size of this shift suggests voters had more on their minds.
High prices and the war with Iran were prominent concerns. Higher diesel prices affect farmers, truckers, and ultimately the cost of moving goods. Businesses are also dealing with higher borrowing costs and tariffs on some raw materials. Households that already owned homes or stocks benefited as asset prices rose after the pandemic. Younger households trying to buy a first home, sometimes while paying down student loans, experienced the same economy in very different ways.
Divided government makes contentious funding negotiations more likely and major tax legislation harder to pass. If Democrats build on these gains in 2028, we could see renewed debate over corporate taxes and the rates on ordinary income, capital gains, and dividends. With that election still two years away, I’d base planning decisions on the law in effect today.
Technology’s selloff and AI's tug-of-war
The election came as investors were already questioning how quickly heavy AI spending would turn into profits. Technology stocks fell sharply last week, and some of our managers believe forced selling by leveraged investors amplified the decline.
A leading tech company added a separate concern. Its CEO is in the news over controversy involving claims of an extramarital affair, and investigations into whether they had been targeted by a foreign intelligence effort. The espionage claims remain allegations, and I expect we’ll learn more in the coming weeks. While the leading tech company has experienced a significant sell-off, the Nasdaq Composite has risen almost 2%. That divergence caught my attention. For a more risk-oriented investor, after the recent sell-off, some tech valuations may warrant a fresh look.
Yet the longer-term AI question goes beyond today’s stock prices. Data centers can bring jobs and tax revenue, and communities have legitimate questions about electricity, water, and who pays for new infrastructure. Some are actively courting these projects. How quickly developers can secure power and local support will help determine where the investment goes. If too few U.S. communities can accommodate it, some of that growth could go abroad.
Now at week's end after last week's tech rout, we have seen lots of volatility but not much overall gain or loss. Whether it holds in coming days and weeks will depend in part on what companies tell us about AI demand, spending plans, and the cost of financing new data centers.
What I’m watching now
The latest jobs report offered some reassurance. Employers added 165,000 jobs in October, and unemployment was 4.1%. Brent crude traded below $90 on Tuesday as the White House played down the prospect of additional strikes on Iran. This morning's inflation report came in hotter than expected, primarily due to higher oil and imported goods costs.
In the coming weeks, I'll be watching news of ongoing Nvidia and data center challenges and listening for Fed comments to tell us about the economy. In a week like this, several asset classes can move together, up or down. Over the following months, the differences tend to show up as each responds differently to changes in growth, inflation, and interest rates. That’s why we spread investments across asset classes and build portfolios around each client's specific needs.
Tax Review
Over the next 30 days, we will complete our annual year-end portfolio review, including capital gains realized in your accounts and opportunities to make adjustments that could reduce your tax impact or better position your portfolio for the year ahead.
We will be in touch in early December to discuss our findings. In the meantime, please contact James or me with any questions or concerns.
With gratitude for your trust and confidence, we wish you a happy holiday season!
Bob and James
Disclaimer: "Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing."