AXIOMA ROOF™ SCORE HIGHLIGHTS

It is a sin in investing to invent the facts on which one's investment thesis rests. Yet a degree of subjectivity is unavoidable in a practice whose ultimate aim is not to establish what is, but to forecast what might be. An honest forecast, however, is not necessarily an accurate one. Its integrity lies not in whether the future unfolds as anticipated, but in whether the assumptions underpinning it were reasonable, the evidence weighed fairly, and the uncertainties acknowledged. The future is under no obligation to validate our expectations, just as an outcome that vindicates a forecast does not, in itself, validate the reasoning behind it. Being right for the wrong reasons is no less a failure of analysis simply because the market rewards it. Confusing the two is one way investors learn the wrong lesson.

The bond market is now delivering its own lesson about uncertainty. August and September's rise in Treasury yields was largely a repricing of the expected path of policy rates, as investors moved from anticipating cuts to demanding hikes. October has been different. The continued rise in yields has been driven less by changing expectations and more by a rising term premium: the additional compensation investors demand when the future becomes harder to predict.

Investors do not demand a term premium because they expect a particular outcome. They demand it when confidence in any forecast begins to erode. The problem facing investors today is not simply that they disagree about the future. It is that the assumptions required to forecast it are being rewritten in real time: peace negotiations one week, escalation the next, ‘Diesel Gate’ the week after. Fiscal policy, trade policy, foreign policy and even monetary policy expectations can shift between one press conference and the next. When the facts themselves appear provisional, forecasting becomes less an exercise in prediction than in adaptation.

Recent Treasury auctions illustrate the point. Two weak auctions in the 5-year and 20-year bonds were followed by stronger demand for the 10-year and 30-year ones. Yet neither result changes the underlying reality. The United States still carries roughly $40 trillion of debt and an annual interest bill of more than $1 trillion. The tide comes in, the tide goes out. The rocks remain.

The Midterm elections are less than a month away, and four states where the Trump-backed candidate won their primary challenge are now suddenly in play for Democrats: Texas, North Carolina, South Carolina, and Georgia. Could the Senate flip again, as it did in 2020 and 2022, because of these candidates? If so, Donald Trump will have learned for a third time the limits of political loyalty. By elevating candidates whose principal qualification was his endorsement, he may once again discover that while it is easy to love one's loved one, it is considerably harder to love one's loved one's loved ones.

The irony is that such a result would arrive just as the populist Right continues to advance across much of Europe and Latin America. The United States appeared to be at the forefront of that movement both in 2016 and again in 2024. But voters may be about to demonstrate for the second time that what looked like a shift to the Right was, in many cases, a rejection of the Center. They voted against an establishment that had disappointed them. That does not necessarily mean they will vote for anyone presented as its alternative. Trump's success may have reflected the strength of the backlash more than the transferability of his endorsement.

Investors are not being asked merely to forecast growth, inflation or interest rates. They are increasingly being asked to forecast politics, institutions and the rules of the game themselves. That challenge will come into focus again next month, when a White House inquiry examines Lisa Cook, a governor of the Federal Reserve, as part of President Trump's continuing effort to remove her from office. The hearing follows a broader confrontation over the independence of the central bank and raises questions about the future relationship between the White House and the Fed.

Investors are no longer being asked merely to forecast growth, inflation or interest rates. They are increasingly being asked to forecast politics, institutions and the durability of the rules themselves. If every press conference has the potential to alter trade policy, fiscal policy, foreign policy or the independence of the central bank, then the problem is no longer forecasting the future. It is forecasting which assumptions will still be valid by the time the future arrives.

Investors' response to that uncertainty is visible in the convergence of sentiment towards the middle. Sentiment ended last week with six of the ten markets in Neutral territory, alongside two marginally Positive and two marginally Negative readings. That convergence carries its own message: investors in very different markets are arriving at remarkably similar emotional conclusions. Cross-market dispersion remains at the 1st percentile of its entire history, unchanged from last week and down materially from the 44th percentile a month ago. Sentiment has been compressed since late September, and the speed of that convergence has been matched in only 12.4% of historical observations. Investors are still free to disagree about the future. They are simply choosing from an unusually short menu.

This week also marks the beginning of the Q3 earnings season. Alongside US inflation, retail sales and industrial production data, investors will hear from companies including TSMC, ASML, JPMorgan Chase, Bank of America, Citigroup, Johnson & Johnson, LVMH and UnitedHealth. After several months in which policymakers have revised the script faster than investors could read it, many will hope the people running businesses prove more reliable guides to the future than the people running governments.

For now, however, the broader picture remains one of investors withholding strong judgement rather than expressing strong conviction. After a month spent converging on roughly the same conclusion, investors appear united mainly by their reluctance to pretend that they know what happens next. 

Aggregate ROOF Trend: The black line is the aggregate mean of ROOF scores across the ten markets; the shaded grey band shows the range from the most bearish to the most bullish market on each day, indicating the dispersion of sentiment across the universe. Reading it: a rising line indicates increasing risk tolerance; a declining line indicates increasing risk aversion. 

Bottom strip: cross-market dispersion percentile — the cross-sectional standard deviation of ROOF across the ten markets, percentile-ranked against its own full history. Shaded zones mark elevated (>80th percentile) and compressed (<20th) readings. Reading it: a spike into the top shaded zone is a material divergence episode (sentiment moving in different directions across markets), a slide into the bottom shaded zone is a material convergence episode on a common driver (sentiment moving in the same direction across markets).

Regime Distribution: Three horizontal stacked bars show how the ten markets are distributed across the five regimes — today, one week ago, and one month ago. Each bar is colored by regime: red (Bearish), yellow (Negative), grey (Neutral), blue (Positive), green (Bullish). The white vertical marker on each bar shows the aggregate ROOF score for that period. Tick marks below the bars align with the regime thresholds at ±0.20 and ±0.50. Reading it: a leftward shift over time indicates broadening deterioration; a rightward shift indicates broadening improvement. Widening tails signal rising dispersion.

Market Monitor: A table showing, for each market: current ROOF score, current regime, weekly and monthly changes, regime one month ago, and distance to the nearest extreme threshold. Color cues highlight regime deteriorations (red) and improvements (green). Reading it: scan the "1M Ago Regime" column for markets that have crossed regime bands over the past month; check the "Distance" column to find markets close to the ±0.50 extreme thresholds.

Correlation Matrix (Δ1M): A heatmap of correlations between monthly sentiment changes across all market pairs, over a rolling 60-day window. Green cells indicate that investor sentiment in the two markets changed in the same direction; red cells indicate opposite directions. The rightmost column shows each market's average correlation with the rest of the universe. Important: these are correlations of sentiment changes, not market returns or ROOF levels. High correlation means investor mood in the two markets moved in sync over the past 60 days.