WEM Market Notes: Beyond noise

As of November 5, 2025

Market noise has long been a stumbling block for investors, as Fischer Black noted when he distinguished noise from true information. The challenge lies in separating distraction from signal, a skill especially relevant amid today’s headlines of a prolonged government shutdown, shifting monetary policy, and uneven global growth. This report cuts through the noise to examine how these forces affect markets, focusing on equities, bonds, and foreign exchange, and the role of diversification in navigating late-cycle volatility.

Equities

Historical data show that US government shutdowns have rarely caused lasting damage to stock performance. Since 1976, about half of shutdown periods saw stocks rise even during the closure, and in most cases, the S&P 500 was higher 3, 6 and 12 months afterward. The most recent comparable shutdown in late 2018 lasted 34 days and was followed by positive equity returns in subsequent months, underscoring that these events typically do not derail longer-term market trends (see Appendix).

The ongoing federal shutdown, now over a month long, is more comprehensive than the partial 2018 episode, with all nonessential spending halted. We note an increased risk of a protracted shutdown, but so far, markets have remained relatively calm. A robust labor market and solid private-sector fundamentals are helping cushion the economic impact. Investors appear to expect that any furlough-related disruptions or federal spending delays will be temporary and absorbed by the economy’s underlying strength.

We note that equity investors are being advised to look past the political noise and focus on the key drivers likely to support markets over the next 12 to 15 months. Several tailwinds remain in place, including broad deregulation efforts, anticipated tax cuts for businesses and households, and a continued trajectory of Federal Reserve interest rate cuts, with the most recent cut delivered in October. Sustained high levels of technology investment also remain a key support.

With index gains still heavily concentrated in a few mega-cap tech names, the valuation and concentration risk in the S&P 500 is becoming harder to ignore. We think investors should begin repositioning as market breadth starts to widen. History shows that across multiple cycles, periods of broader S&P 500 leadership have coincided with stronger relative performance from mid-caps, which offer a healthy balance of growth, quality, and diversification. Unlike the top-heavy large-cap segment, mid-caps are not beholden to a handful of firms and are better aligned with US economic momentum. As leadership inevitably expands beyond today’s narrow group of winners, mid-caps look well placed to capture a larger share of future upside.

_{US Mid-Cap vs. Large-Cap Performance Over Multiple Market Cycles}

^{Concentration is calculated as the weight of top 10 holdings in the S&P 500 index across time.
Source: Wealth Effect Management, Bloomberg Professional Terminal. Data from 01.01.2000 to 30.09.2025.}

Bonds and Foreign Exchange

We hold a bearish near-term outlook on the US dollar, noting that the currency remains elevated even after a year of weakness. Widespread pessimism toward the dollar is evident in futures positioning, as speculative traders have accumulated large short bets against it and corresponding long exposures in major currencies such as the euro and yen. This heavy negative positioning has persisted through 2025 and could continue to weigh on the dollar’s performance in the near term.

Several factors are driving dollar weakness. The Federal Reserve’s pivot to rate cuts in 2025 and concerns about a potential US economic slowdown have both pressured the currency. With the Fed delivering a rate cut in October, US interest rate differentials versus other major economies have narrowed, weakening one of the dollar’s traditional sources of support. The prospect of additional easing, combined with signs of moderating domestic growth into early 2026, continues to reinforce bearish sentiment. In the bond market, declining yields under a looser policy stance have supported prices. From a tactical standpoint, we favor intermediate-term US bonds, as they currently provide a more attractive balance between yield and duration exposure.

Despite prevailing negativity, we note that the crowded short-dollar trade could set the stage for a reversal. It may not take much to trigger a shift in sentiment. Potential catalysts include an earlier-than-expected pause in Federal Reserve rate cuts, stronger-than-anticipated US economic data, or an increase in political or geopolitical uncertainty abroad that enhances the appeal of US assets. Any of these developments could cause traders to unwind short positions and push the dollar higher in the short run.

Looking ahead, we expect the dollar to stabilize against other major currencies by the end of 2026, but our base case is that the dollar has officially entered a bearish cycle. These cycles have occurred in the past and, most importantly, have often been accompanied by strong performance of non-US equities. Investors should be aware of this historical relationship as they consider global diversification. A sustained period of dollar weakness could coincide with a broadening of market leadership beyond US technology, supporting a relative tailwind for international markets.

_{US dollar trade-weighted index}

^{Last peak observed on 30.09.2022.
Source: Wealth Effect Management, Bloomberg Professional Terminal. Data as of 03.11.2025.}

Asset Allocation View

Diversification has always been a core principle of portfolio construction, but it has become even more important given how much the economic environment has changed recently. Interest rates, central bank policy, and global growth trends have all shifted in ways that meaningfully affect positioning across equities, fixed income, and alternatives. In response, we have updated our tactical guidance to better reflect the current landscape and the opportunities we believe are most compelling right now.

The table below outlines our latest views by asset class and sub-category as expressed in our WEM Model Portfolios. These positioning changes are designed to balance risk, reduce reliance on any single market driver, and capture areas where we see stronger return potential in the months ahead. They are also suitable for euro-denominated investors who want to manage their US dollar exposure more intentionally, rather than leaving FX risk unhedged by default.

^{Asset Allocation View Summary}

For more information, please contact your wealth manager.

Appendix