Five weeks after its last read, RiverFront Investment Group finds the S&P 500 down just over one percent, buffeted by inflation, Fed uncertainty, the midterm elections and the Iran War. In the latest Three Tactical Rules update1, Kevin Nicholson, Global Fixed Income CIO and Partner, reports that the collective signal is still flashing yellow, even as the components beneath it quietly move. His verdict is measured: "Collectively, the Three Rules continue to favour a cautious optimism toward stocks in balanced portfolios."
The Fed: Hawkish Talk, Accommodative Math
The FOMC held the fed funds range at 3.75% to 4.00% on October 28, but the 10 to 2 vote, with both dissenters favouring a quarter-point hike, signals that tightening is not finished. The team expects another hike in December. To be clear, Nicholson does not read that as hostile. He writes, "we argue that the Fed is still on the investor's side because it has yet to undo the accommodation that it afforded investors last year by cutting the fed funds rate by a total of 75 bps." He adds that "hiking helps lend Kevin Warsh, a relatively new Fed Chairman, credibility that he is independent and taking inflation seriously." By the team's arithmetic, two more hikes remain before the accommodation is gone.
The tripwires are specific. A two-year Treasury yield, now 4.59% and down from 4.85%, breaking above 5% would signal a more aggressive Fed. Credit is the second watchpoint: "Given the high levels of corporate borrowing to finance the buildout of AI, we are monitoring for signs of significant distress, but we are not currently seeing it among the higher quality issuers." Either could push the rating to flashing red or red. Cooling inflation could earn an upgrade. For now, it stays a yellow light.
Abroad, the Bank of England is the lone major central bank yet to hike this year, with UK inflation at an eleven-month high of 3.5% and a meeting on November 5. The ECB held at 2.50% and the BOJ paused, yet OIS markets price at least one hike for each by year-end. Nicholson concludes, "Globally, we now view central banks as neutral rather than on the investor's side…however, we do not see a prolonged hiking cycle ahead."
The Trend: Slower, Still Friendly
The S&P 500's 200-day moving average is rising at a 16% annualized rate, down from 18%. Nicholson is unbothered: "we are not concerned about the trend, as it will remain positive if the index simply remains at its current level for the next 9 months." Historically the index rises in roughly two-thirds of three-month periods, and an upward-sloping trend tilts those odds higher. The rating holds at green light, with a modest preference for stocks over bonds.
International: A Downshift, Not a Breakdown
The ACWX trend has slowed to 12% annualized from 23%. International equities lagged domestic by 1.54% over five weeks, flipping a year-to-date lead into a 0.73% shortfall, a move Nicholson ties to oil-driven inflation and rising deficits. "The international momentum downshift, while not ideal, is not dire." Q3 earnings are running above Q2, and the trend survives four flat months. Even so, the rating drops one notch to flashing green.
The Crowd: Two Polls, One Neutral Read
NDR's survey-based Weekly poll sits in extreme optimism, while the market-based Daily poll, which folds in put/call ratios and volatility, sits mid-neutral. The team has historically leaned on the Weekly, but "Given that we have entered the period before mid-term elections when we believe markets can be more volatile based on history, we are giving the Daily more emphasis in our analysis." Optimism is elevated but short of 2018-style euphoria, and last week's tech declines have already cooled it. The blend reads neutral, matching the last three updates: yellow light.
The Grind Continues
"Given that our collective rating of the Three Rules has not changed in our last three updates, we continue to believe that the market will grind higher this year." The team expects the rules to shift as data, earnings and geopolitics evolve, and over three to six months favours domestic and international equities over bonds, provided inflation does not accelerate and central banks are not forced to tighten harder. When the facts change, the positioning will too. For now, they have not.
Five Key Takeaways for Advisors and Investors
- Watch the 5% line. The two-year yield sits at 4.59%; a break above 5% would flag a more aggressive Fed and a possible downgrade to flashing red or red.
- Hikes are not automatically hostile. With 75 bps of cuts still in place, the Fed can hike twice before accommodation is removed.
- Trend math rewards patience. The S&P 500 trend stays positive through nine flat months; ACWX through four.
- International leadership has stalled, not reversed. Flashing green reflects slower momentum, with Q3 earnings the near-term test.
- The equity tilt is conditional. The preference for stocks over bonds holds only while inflation stays contained and central banks are not forced to escalate.
Footnote:
1 Nicholson, Kevin. "Flashing Yellow: Stuck on the Same Song; Three Tactical Rules Keep Hitting Repeat." Weekly View, RiverFront Investment Group, 3 Nov. 2026, https://www.riverfrontig.com/insights/three-tactical-rules-update-nov-2026/.
