October 14 brought a reminder that inflation is not finished yet. A hotter-than-expected consumer price report pushed bond yields higher and pulled stocks back from near-record levels. Days like this tend to raise the same questions: what changed, what did not, and whether it calls for a different approach.

Below is our view of the markets and how our portfolios are positioned. Whether you have worked with us for years or are reading our updates for the first time, we hope it gives you a clear and practical picture of where things stand.

Summary

We remain fully invested across our strategies, with a more watchful stance after the October 14 inflation report.

• The backdrop is still supportive. Global liquidity, the flow of money and credit through the financial system, is at a record level and still growing. Historically that has favored stocks and other growth assets.
• Growth is cooling and inflation is sticky. September consumer prices rose 3.7% from a year ago. Interest rates remain high, and markets are again pricing the chance of another Fed rate hike.
• Our response is measured. We are not adding risk on this news, and our portfolios already hold defensive positions that can be increased quickly if conditions deteriorate.

Markets in brief

Stocks pulled back from near-record levels on October 14 as the inflation report pushed yields higher; technology and smaller companies fell the most.

September CPI rose 0.6% for the month and 3.7% over the year (3.6% expected); core inflation, which excludes food and energy, rose 0.3% (0.2% expected). Gasoline drove the headline figure; shelter, airfares and used cars drove the core.

The year so far has rewarded stocks and energy, while the traditional diversifiers, bonds and gold, have given back ground as interest rates rose. Bitcoin has also slipped from its year-end level. That mix is why we hold several kinds of ballast rather than relying on any single one.

Our read

Our research still points to a supportive environment for long-term investors, though the second half of the cycle calls for more care than the first.

The main driver in our process is liquidity. It is at a record level and has grown at about 5% a year over the past three months. Periods like this have tended to favor stocks, commodities and digital assets. We expect the current upswing to continue into early 2027.

The risks are on the growth and rate side. Inflation is running above the Fed's target and long-term rates are high, which strains borrowers and slows the economy. Our base case for 2027 is a slowdown, not a recession. That is why we are emphasizing quality companies and adding protection gradually rather than making large changes.

Long-term rates have climbed back to levels last seen before the 2008 financial crisis. Higher yields make bonds more attractive to own, but they also raise borrowing costs, which is why we keep interest-rate exposure moderate.

We track a set of market stress measures every day, covering the bond market, credit markets and the trend of the stock market itself. Today none of them calls for a major shift. Several are close enough to their thresholds that we are watching them closely.

Even after the October 14 decline, the index sits above its 200-day average, a common gauge of the long-term trend. Trend is one of several measures we review every day.

How the portfolios are positioned

All four strategies remain invested in line with their objectives, and each has a defensive plan ready if conditions change.

Most clients hold a blend of Growth and Stability. The balance between them is set for each household's goals and risk tolerance.

Recent changes and what we are watching

Our recent changes have been small and defensive at the margin; we made no reactive trades on the October 14 inflation report.

• Rates: in early October the Stability strategy added a modest position in intermediate-term Treasuries as yields reached attractive levels.
• Energy: we trimmed energy and commodity-producer positions after the summer rally and are not adding to them.
• Quality: where we redeployed cash, we favored high-quality U.S. companies with steady cash flows.

What we are watching:

• The Fed's next decision and whether inflation pushes it toward another rate hike
• Credit markets, which usually signal economic stress before stocks do
• Our month-end rebalance on October 30, when the rules-based momentum portion of Growth and Ultra Growth is reviewed
• Third-quarter earnings from AI and semiconductor companies, a central theme in our growth strategies

A closing note

Days like October 14 are a normal part of investing. Our process is built to stay invested while the long-term backdrop is supportive, and to reduce risk deliberately, not emotionally, if that changes.

If you are a client of Sovereign and have questions about your account or would like to review your allocation, please reach out to us directly.