The story of the week was not the election itself, but rather the brutal reversal that followed. While Democrats secured a decisive victory by winning both the House and Senate, investors initially viewed the outcome as largely market-friendly. Conventional wisdom suggests equities perform well under a divided government and, while unified Democratic control was not the expected outcome, markets initially concluded that major policy shifts would still be difficult to implement quickly.
By Wednesday morning, equities were trading firmly higher as investors focused on continued earnings strength and the belief that Washington was unlikely to generate immediate disruptions to the economic outlook. The optimism proved short-lived.
Thursday brought a dramatic shift in sentiment. Debate surrounding AI investment spending, the sustainability of future growth expectations, and the possibility of a slower pace of data-center expansion triggered aggressive selling across many of the market's biggest winners. Stocks most closely associated with the AI buildout bore the brunt of the damage as investors reassessed valuations that had become increasingly crowded and extended.
The result was one of the sharpest single-day reversals of the year. The Dow Jones Industrial Average fell more than 3%, the S&P 500 declined over 4%, and the Nasdaq lost over 5% from the prior day's close. Profit-taking quickly evolved into broader risk reduction as investors rushed to unwind highly concentrated positions. What began as a reassessment of future growth assumptions became a momentum-driven decline that accelerated throughout the session before eventually stabilizing at significantly lower levels. Friday's trading produced a modest bounce, although conviction appeared limited and investor confidence remained fragile.
Meanwhile, developments in the Middle East added another layer to the market narrative. Reports suggesting diplomacy with Iran was gaining traction emerged prior to the election and helped initiate a sharp decline in oil prices. Brent crude, which had recently traded near $118 per barrel on fears of regional escalation and supply disruptions, fell aggressively throughout the week.
The election results appeared to accelerate the move, as investors interpreted a Democratic-controlled Congress as increasing the likelihood of diplomatic efforts aimed at reducing tensions in the region. Brent briefly traded near $93 per barrel before recovering somewhat as continued attacks on shipping in the Strait of Hormuz reminded traders that geopolitical risks remain elevated. In my view, the $100 per barrel level remains a key dividing line. Above that threshold, markets are assigning a meaningful geopolitical risk premium; below it, investors are signaling greater confidence that supply disruptions can be avoided.
Given the combination of a sharp equity correction and nearly a 20% decline in Brent crude, many investors expected a much stronger rally in Treasury bonds. Instead, the response in rates was surprisingly muted.
Although Treasury yields edged lower, the move was modest compared to the magnitude of the swings in both equities and oil. With the 10-year Treasury yield already having broken below the psychologically important 5% threshold at the end of the prior week, investors appeared reluctant to push yields substantially lower. The longer-term concerns that drove yields to recent highs near 5.36% remain unresolved, including persistent fiscal deficits, ongoing Treasury supply, and uncertainty surrounding the longer-run inflation outlook.
The bond market's inability to mount a stronger rally may have been one of the week's most important signals. Despite a substantial decline in a key inflation input and a significant deterioration in risk sentiment, Treasury investors remained focused on structural issues rather than short-term market volatility.
Looking ahead, the implications of the election remain uncertain. However, the decisive Democratic victory may ultimately be interpreted as a referendum favoring a different foreign policy approach, particularly regarding the conflict with Iran, while also raising questions about the pace of future AI infrastructure spending and data-center expansion.
Should geopolitical tensions ease further and inflation pressures continue to moderate, my previous expectation that Treasury yields could revisit their recent highs becomes increasingly challenged. For now, I continue to monitor 106-02 in the 10-year Treasury futures contract as a critical technical level. A break below that threshold could trigger accelerated selling in bonds and correspond to a move back toward approximately 5.02% in the cash 10-year Treasury yield.
The election may have been the catalyst, but the week's defining story was the market's rapid reassessment of the AI-driven growth narrative. Oil collapsed on hopes of diplomatic progress, technology stocks sold off as investors questioned future data-center spending, and the bond market signaled that long-term inflation and fiscal concerns remain firmly in place.
Contributions from Ryan Riffe
Municipals kept the momentum going, extending their October rally right into the first week of November with some solid gains. A mix of improved technicals, a lighter calendar, fewer customer bid-wanteds, and falling Treasury yields all worked together to fuel this week's strength. By Friday's close, benchmark yields dropped by as much as 17 basis points.
We saw robust buying across the entire curve, though the strongest demand pinned down the intermediate 7 to 10-year spot. Front and intermediate maturities continued to outpace Treasuries, which pushed Muni/UST ratios even lower—in just a month, we've watched short-term ratios collapse from the low 70s down to the high 50s.
With demand severely outweighing supply, both the negotiated and competitive calendars were incredibly well received. Most deals came in oversubscribed and ultimately repriced to lower yield targets.
Looking ahead, the municipal landscape seems poised to hold steady as we head into a shortened holiday week. We're looking at just $5 billion in new issue supply hitting the market next week, which cuts the prior week's volume nearly in half.
| 2-YR | 58% |
| 3YR | 59% |
| 5-YR | 62% |
| 10-YR | 67% |
| 30-YR | 89% |
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