Smart Investor: Why Diversification Is Back, Bond Yields Are Jumping, and the Sectors Topping Earnings

The big news this past week certainly lived up to expectations. Stocks pushed to fresh highs following the US presidential election, as investors took the potential Republic sweep of the White House and Congress to mean big tax cuts and loose fiscal policy are in the cards. With the latest rally, the Morningstar US Market Index gained more than 5% in the past week, and it’s now up on the order of 25% in 2024 and north of 36% over the last 12 months.

However, not all investors are cheering the election results--at least not in a way that drives up prices. Instead, a fresh selloff took longer-term bond yields to their highest levels since early summer. Why is the bond market taking it on the chin? As Gabe Alpert explains, there are two main worries, one of which is the exact reason the stock market was cheering: What a Republican Congress and White House could mean for fiscal policy and inflation.

Wondering where the opportunities might be in the wake of the election? Ivanna Hampton spoke with Morningstar’s Dave Sekera about what investors need from the market’s “Trump bump,” tax cuts, tariffs on China, and more.

Stocks and bonds moving in the opposite direction may not seem like something most investors would root for, but it’s good for 60/40 portfolios. If you recall, in 2022, both bonds and stocks got clobbered, leading to lots of handwringing about the death of diversification. Well, diversification is back! As Bella Albrecht explores, the 60/40 portfolio has been doing exactly what it is designed to do, highlighted during the summer’s selloff. There are some great charts in this great read.

There also happened to be a Federal Reserve meeting this week, though it was overshadowed by the election. Still, the Fed cut rates again, this time by a quarter of a percentage point. Bond traders still think the central bank will cut again in December, but after that, the path is a little more uncertain. Morningstar’s senior US economist Preston Caldwell has his take on the Fed’s decision and what could come next.

As if all that wasn’t enough, it’s still earnings season! Sarah Hansen looked closely at third-quarter earnings and reports that overall, results are solid. Under the hood, Hansen identifies two sectors where stocks have been knocking the ball out of the park and one sector where results are looking soft.

Closing things up for the week, we’ve got our screen for newly undervalued stocks, with 16 names for long-term investors, including Thermo Fisher and Mondelez International. Plus we’ve got our monthly look at undervalued stocks that just raised dividends. This time around ,two stocks made the cut.

As always, check out our Markets page for our latest coverage and live stock market updates, along with our weekly calendar of key upcoming data and events.

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