By David Coombs

Autumn is often a tough time for markets. The weather has worsened, the days are shorter, the light fades and people’s moods along with it.

When all the technology, mathematics, valuation decisions and retrospective rationalisations are stripped away, markets are just barometers for the optimism and caution that battle each other out in the minds of millions of investors. And this year’s change of season was tough indeed.

While little, really, has changed in the big issues of the day – the paths of inflation, GDP growth and interest rates – the mood of investors has definitely darkened. And it seems more for human reasons than because of cold, hard financial logic.

There’s comfort in that. It has seemed an especially dark couple of months, where every week brought another storm, where terrorism, war and worry have dominated our screens. There’s solace in shared experience – in seeing humanity in even the most impersonal devices we’ve created.

Global stocks fell almost 10% over the three months to 31 October, which is a significant drop. UK investors, broadly, have been cushioned by a roughly 5% increase in the value of the dollar, which reduces losses when you convert values back into pounds and pence.

During gloomy times like these, we try to focus on what’s coming beyond the here and now. Autumn and winter will pass, as will the specific concerns on which investors fixate today. We’ve been using lurches in the prices of shares and bonds to trim those investments that are looking overvalued and buy more assets that seem undervalued.

For instance, we have bought more shares in medical technology businesses, like those that help people monitor and manage diabetes, which were sold aggressively after positive early reports of new diabetes and weight loss drugs like Wegovy and Ozempic. These new medicines are powerful tools for tackling obesity, one of our most pressing health problems, yet they aren’t a silver bullet. We think monitoring technology and other management tools will still be needed in the years ahead, particularly as the side-effects are yet to be fully known.

We have been selling some of our shares in the tech giants at the top of the S&P 500 index of US stocks after AI excitement drove some hefty increases in their share prices. We think these are great businesses and we expect to hold them for many years to come, yet assumptions about how much money will flow from computers taking over the world seem optimistic to us. We think it’s prudent to sell some of our shares and lock in profits to buy other assets that seem less in vogue.

Much of the reason for the sharp drop in stocks – and the rise in the dollar – over the third quarter was a substantial rise in the prevailing yield of US government bonds. This just means their prices sank as well, which means you get more income for your buck than you did a few months ago: a higher yield. And more bang for your buck attracts more people, so the demand pushes up the value of the dollar (you need to have dollars to buy US government bonds).

Why did bond yields suddenly rise? After a summer of growing confidence that the US central bank was going to pull off the tricky ‘soft landing’ – reining inflation in to the 2% target without causing a recession – many investors reconsidered their conviction.

In October, after a few months of higher inflation in the US and a quarter of particularly strong GDP growth, people spooked themselves by thinking that the US Federal Reserve (Fed) might yet hike rates significantly more. They reacted by selling a whole bunch of government bonds which lose value when central banks increase interest rates.

The Fed itself has been pretty clear that it plans to wait and assess the effects of the medicine it has already administered to the economy. And we’re on the side of the Fed here. We think the already large uplift in the central bank’s short-term benchmark rates has yet to be truly felt by households and businesses. With each passing month debts roll over to higher interest rates, leading businesses to reassess the viability of projects now that financing is substantially more expensive, and leaving people with less money after the monthly bills.

We think interest rates have now peaked – and if not, that only one more hike is on the cards. We were comforted by greater-than-expected falls in inflation both in the US and the UK in early November – we think they show that the concerns of the past should give way to the future.

David Coombs is lead fund manager, multi-asset portfolios, at Rathbones