"October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February."

More going on under the surface

October reminded investors that markets don't go up in a straight line. What I find interesting is that the volatility underneath markets has been much greater than the headline numbers suggest. Some of the most crowded trades have been hit hard.

My read is that the bull market isn't broken, but risk appetite has taken a knock. There has been a lot of leverage and momentum in parts of the market, and some of that is now being washed out. That's healthy longer term. But I wouldn't rush to call the bottom. Not until oil has peaked.

The good news is that rates are off their highs. Last month I said that if the pressure on rates eased, bonds and rate sensitive shares could bounce quickly. My bet looks good for now. The one that worries me is French bonds, and I'm watching them closely.

Is the AI trade slowing? Yes, but there's an important distinction. The investment cycle isn't slowing. Companies are still spending enormous amounts on AI infrastructure. What is slowing is investors' willingness to pay any price for that growth.

Funding is also getting harder. Credit spreads are widening, and the market is forcing the likes of Meta to raise equity rather than go to the bond market. That's quite a turn, only a month after Muse sent its shares up 36%.

The market is now saying: show me the return on all this capex. That's a big change. We've gone from everything AI going up together to investors being much more selective. Companies with real earnings, cashflow and demonstrable returns will be rewarded. Those relying on the story alone could struggle.

I suspect the easy money in the AI trade has been made.

Anthropic heads to market

The other big AI story of the month was Anthropic filing for its IPO, with a proposed Nasdaq listing under the ticker ANT. I really like the ticker.

When everyone is really bullish on something, it makes me a bit nervous. But with Anthropic and the whole AI complex right now, it’s the opposite. There’s more than a healthy dose of scepticism around. People are climbing over themselves to be bearish.

What I like about the prospectus is the growth in enterprise. Anthropic has around 11,900 customers spending more than US$100,000, 1,900 spending more than US$1 million and 250 spending more than US$10 million. The demand is real, the revenue is real, and it's growing fast.

The concern is the cost. Anthropic has over US$800 billion of commitments to compute and infrastructure. That goes straight to the question the market is now asking of the whole sector: show me the return on all this capex. There's also been talk about a 50.1% controlling stake, the so-called God stake, but I'm less worried about that.

So is it worth at least US$1.5 trillion? I can't wait to find out.

Selective, not defensive

Investors aren't running for the exits. They're becoming more selective. Money is moving away from highly valued, long-duration growth stocks towards businesses with strong balance sheets, cashflow and predictable earnings. There has also been some fairly obvious rotation into traditional defensive areas.

One example: the equal-weighted S&P 500, where every company counts the same, is outperforming the tech-heavy Nasdaq 100. Ironically, lower rates on the back of AI growth concerns have helped the rest of the market.

That's what usually happens when confidence wobbles. Investors don't leave the market altogether. They just become much less tolerant of valuation risk and speculative stories.

A surprise from the RBNZ

I was surprised by the Reserve Bank's decision to pause. I thought another 25 basis point hike was the most likely outcome, and the market had priced it that way.

The pause is helpful for the NZ economy. It should support the rate sensitive parts of our market: smaller domestic companies, property and other businesses that have been under pressure from higher rates.

But it isn't the all-clear. It was a 4-3 decision, and the RBNZ is still signalling another hike may be needed. A weaker NZ dollar also creates another inflation problem if it persists. I suspect there was an element of not wanting to interfere, given voting in our election started that week. The next six weeks of inflation and economic data will be very important.

How our funds fared

Our four Pie KiwiSaver Scheme funds beat their benchmarks for the month. Our investment in Icehouse Ventures, which holds Halter and other New Zealand companies, continued to perform strongly, and the Growth Fund returned +1.4% compared to -1.8% for its benchmark.

The rate-sensitive funds bounced back as rates came off their highs. The Pie Property & Infrastructure Fund returned +5.6% and the Pie Fixed Income Fund +1.4%, recovering much of September's fall. The Pie Global Growth Fund returned +0.3%.

Most of our Australasian funds outperformed their benchmarks in a small caps market that again went backwards. The Pie Australasian Growth Fund returned -0.5% while its benchmark fell -6.3%, the Pie Australasian Growth 2 Fund returned -1.2% against -2.6% for its benchmark, and the Pie Australasian Dividend Growth Fund returned -3.0% compared to -6.3% for its benchmark. The Pie Australasian Emerging Companies Fund had a tough month, returning -9.6%, while its benchmark returned -9.4% (all returns after fees, before tax).

Two elections, one week

At the time of writing, both the US midterms and our own election are upon us.

In the US, a Democrat win in one or both houses of Congress probably means more gridlock in Washington. Markets can live quite happily with gridlock, because it limits the ability of either side to make major policy changes. I'd expect some initial volatility, but rates, oil, earnings and AI will matter far more to markets than the midterms.

New Zealand could be a little different. If we saw a change to a left bloc government, I'd expect an initial reaction in the dollar and some domestic shares while investors work through the coalition agreement, tax policy, employment regulation and fiscal settings.

But the election alone won't set the direction of the NZ market. We're a small open economy. Global markets, interest rates and company earnings will have a much bigger influence.

There could be some noise around both elections. But, I wouldn't make a major investment decision based on either result.

If you haven’t already done so, there’s still time to register for our five-stop investor roadshow which kicks off from 17 November. I hope to see you there.