Quarterly Newsletter for the 3rd Quarter 2023
This year seems to be caught in the proverbial “good news, bad news” scenario. The bad news- the U.S. equity markets were down in the third quarter. The good news- the U.S. equity markets are up for the year.
On a price return basis, as of September 30, the Dow Jones Industrial Average (DJIA) was down 2.62% for the quarter, but up 1.09% for the year. The Standard and Poor’s 500 (S&P 500) was down 3.65% for the quarter and up 11.68% for the year, while the NASDAQ dropped 4.12% during the quarter, yet yielded an impressive 26.3% return year to date. The MSCI all Country World ex-US Index was down 4.43% for the quarter, but still up slightly for the year with a return of 2.91%. In the fixed income environment, the Barclays Merrill Lynch 3-month Treasury Bill Index has yielded 4.47% year to date and the Bloomberg Aggregate Bond Index is up a slim 0.64% through September 30.
Fixed Income Market (Bonds): The bad news- the Fed has given us no definite direction of what they will do with rates from this point forward. The good news- the Fed has paused their interest rate increases for a second time and they continue to take a wait and see attitude. They are waiting to see if their campaign of 11 interest rate hikes since March 2022 was enough to end the worst inflation cycle in over four decades. The Fed funds rate (the lending rate the Fed charges the nation’s largest banks) hiked more than 1000% over the past 18 months. The FOMC (Fed) remains committed to bringing inflation down to their 2% goal and to keeping longer-term inflation expectations well anchored from that point forward. Reducing inflation is most often accompanied by higher interest rates which, in turn, may be accompanied by a period of slower growth and softening of labor/wage market. The Fed and fiscal policy are battling each other as the economy is strong and consumer confidence is still high.
US Equity Market (Stocks): The bad news is a storm may be brewing with government shutdowns, strikes, rising Treasury Yields, an inverted yield curve, waning money supply, climbing oil prices and the resumption of student loans payments. The good news- the economy is strong. Economic data for the third quarter surpassed expectations with real GDP (the total of all goods and services produced across the country) coming in at 4.9%.was forecasted to be flat. Predictions for the fourth quarter are now being adjusted accordingly. Corporate earnings for 60% of the S&P 500 companies are also strong with an aggregated earnings growth rate of almost 8%. U.S. corporations have $4.5 Trillion of cash-on-hand; thus, they remain very solvent and have solid balance sheets. Two major signs of a recession are increasing unemployment rates and lowering wage bases. These issues are not present in today’s economic environment.
Overseas Equity Market (Stocks): The bad news is that tensions in the middle east are flaring and could damage aspects of the overseas economy. The war between Israel and Hamas may interfere with oil supplies and cause oil prices to increase. Obviously, we still have the war in Ukraine and its end is nowhere in sight. The good news is that many foreign markets are beginning to show signs of strength and resilience. There is weakness in China and the Eurozone, but we have improving leading indicators in the emerging markets. Global central banks are continuing their battle against inflation.
Conclusion: We continue to have a skeptical and cautious outlook for the remainder of 2023. All indications point to a strong fourth quarter, but if consumer confidence drops, so will equity returns. Slowing consumer spending and/or increased unemployment could bring a recession into play very quickly. In the longer run, we expect 2024 to be a positive year in the market as stocks seem to perform well in an election year. The Overseas market continues to be undervalued as compared to the U.S. market. We remain positive on the developed international stocks and think that emerging markets may be appropriate for a small percentage of one portfolio- should it meet your risk tolerance. As interest rates are high and, temporarily, stable, it may be time to allocate a small portion of one’s portfolio to the long-term bond market. The Fed may raise interest rates again before the end of the year; thus, we continue to recommend the vast percentage of any fixed income portfolio remain in short-term duration instruments. Finally, we believe that maintaining a diversified portfolio is the best option.
In closing, permit us to express our sincere appreciation for the opportunity to be of service to you. As always, should you have any questions or wish to discuss the above in more detail, please do not hesitate to contact us.