TEN Associates LLC

Labor markets continue to see gains, but is this yesterday’s news? Today's nonfarm payroll figure came in stronger than expected at 165,000 jobs gained in October, with upward revisions of 84,000 for the prior two months. The unemployment rate remained fairly steady at 4.1%. For some time, we've characterized the labor market as a period of "low hire/low fire" jobs growth, whereby firms are neither hiring many new workers nor laying many off. Indeed, average monthly jobs growth over the past 6- and 12-month periods has been 83,000 and 74,000, respectively. Today's stronger numbers are encouraging, but they need to be considered within the context of broader economic growth. Interestingly, we find ourselves in an environment where economic growth and labor market gains appear to be decoupling in profound ways. Real GDP growth accelerated to 3.4% in the third quarter, yet labor market gains have been more modest over the last several months. An outsized portion of the growth we're witnessing derives from capital expenditure related to the AI infrastructure buildout. Consider that investment in computers and peripheral equipment, representing just 2% of overall GDP, accounted for more than a third of GDP growth over the last 12 months. From a monetary policy standpoint, as long as we remain in this solid economic environment, with inflation running well above the Fed's 2% target, labor markets are unlikely to be top of mind for policymakers. Meanwhile, the profound AI investment cycle continues to drive broad economic and corporate earnings growth. Yet an increasingly concentrated group of companies is creating and capturing an outsized share of the benefits, leaving the broader equity market highly sensitive to changes in just a handful of names. In recent days, we've begun to see greater equity market volatility amid concerns over potential future regulation. Today's payroll data was interesting and confirmatory of an economy that has been operating at a breathtakingly strong pace. But it's also a comprehensive read on labor relative to yesterday's economic conditions. Markets today are much more focused on the future of AI spending, capital allocation and rebalancing activity, as well as how a new political framework will influence growth, fiscal conditions and the operating environment for different industries. How, then, should one position fixed income portfolios? In our view, the regime has shifted and fixed income yields reside at historically attractive levels. Real rates are positive across the globe, while the equity risk premium remains paper-thin and equity market concentration creates fragility and volatility that investors don't need to accept. We think a diversified, income-oriented portfolio can deliver equity-like returns today with dramatically less volatility, drawdown and concentration risk. Recent market activity seems to reinforce that view and we think that should continue well into 2027.

The Federal Reserve held interest rates steady today, and we think patience is the right approach. Inflation remains high, but the question isn't simply whether rates should go higher. It's whether higher rates would actually address the inflation that remains. The challenge is that parts of the economy, and of inflation itself, are moving at very different speeds. Growth remains remarkably resilient in aggregate, supported by a powerful investment cycle, but beneath the surface, parts of the economy that are more sensitive to borrowing costs are feeling considerably more restraint. We see a similar divergence in inflation. Many of the cyclical components that respond to higher interest rates appear relatively well controlled. Meanwhile, persistent pressures across energy, insurance, healthcare and education are unlikely to be meaningfully affected by another 25-basis-point rate increase. In some ways, the Fed is operating a house with one thermostat, but very different temperatures in every room. Turning it down further may make the rooms that are already cool even colder, without doing much to cool those that remain hot. That doesn't mean the Fed should become complacent. Inflation is still above its 2% objective and the Fed should retain the option to tighten further if the underlying inflation trend deteriorates. But hawkish rhetoric and patient policy can comfortably coexist, particularly when the bond market has already done some tightening of its own through higher Treasury yields. For investors, we think this environment argues for humility rather than making a heroic directional call on rates. Real yields remain attractive, and there's considerable income available across high-quality fixed income markets. We continue to favor a moderate duration posture, taking advantage of today's income opportunities while remaining patient as this unusually divergent economy evolves. The Fed doesn't need to ignore the heat. It just needs to be thoughtful about where it's coming from.