Since our last report in July, there have not been a whole lot of market conditions that have changed. Sure, things changed, and the markets ticked lower. But the economic concerns such as inflation, interest rates, and recessionary indicators all remained hot topics. We still have a host of ongoing global threats. There have also been recent discussions about government shutdowns.
A slow month of September was slow enough to bring most major indexes lower for the quarter. One of the bright spots was commodities, as you can see below. Let’s see how the broad indexes did and then we’ll examine further:
|Index||3rd Quarter||1 Year||5 Year|
|S&P 500 Large Cap Index||-3.65%||+19.59%||+8.03%|
|S&P Small Cap 600 Index||-5.35%||+8.11%||+1.63%|
|S&P Developed BMI International Index||-3.98%||+19.03%||+4.66%|
|S&P U.S. Aggregate Bond Index (total return)||-2.67%||+1.24%||+0.37%|
|S&P Municipal Bond Index (total return)||-3.50%||+2.80%||+1.14%|
|Dow Jones Equity All REIT Index||-9.28%||-5.60%||-0.75%|
|Dow Jones Commodity Index (total return)||+6.03%||+6.11%||+9.02%|
SOURCE: DOW JONES, DATA AS/OF 9-30-2023 (DOESN’T INCLUDE DIVIDENDS UNLESS NOTED). HERE IS A COMPREHENSIVE LIST OF RETURNS.
Looking back, here are some observations.
Stocks came into Q3 continuing their Q2 rally. But as time went on, most markets started pulling back in August and it continued into September. The optimism from the first half of year rally was replaced with the “higher for longer” catchphrase. Data indicated that the Federal Reserve isn’t yet ready to pivot towards lower rates just yet. Businesses and markets had to digest what that exactly means for their business as well as the economy.
This “higher for longer” landscape has taken the wind out of growth stocks – which had been the main driver of the 2023 rally. Apple, Microsoft, and Nvidia were all down this past quarter. And small-cap stocks were down more than large-cap stocks. The Real Estate sector struggled in Q3 with the rise in interest rates. Bonds (prices) fell as well as they are inversely correlated to rates rising.
Dividend stocks and value companies didn’t do as poorly as their growth counterparts this quarter, and they outperformed for the first time this year. Still, no one likes to see red. Here’s how the relative US equities performed in the past 2 quarters as well as the past year:
What did well you may ask? Commodities, pipelines, and the general energy sector were higher mainly due to the increase in oil prices. Crude oil (WTI) rose above $90 per barrel and the highest it’s been in 2023. For reference, here’s a 20-year chart on the ebbs and flows of oil prices:
Source: J.P. Morgan Asset Management; FactSet.
Certain bond sectors finished positive, such as high yield and floating rate bonds. Income investors seeking yield on their investments were easily able to find 5% and higher on short-term CDs and Treasury Bonds.
In looking at the 10-year Treasury bond rates, we saw a gradual 3-month rise from 3.81% in July to 4.62% by the end of September. That’s an increase of over 21% in a short amount of time and the highest level since 2007.
Could we be facing the third negative performance year in bonds, in a row? Here’s a good visual to put it in perspective – it shows bond returns have been positive in 42 of the last 47 years.
Source: Bloomberg, FactSet, J.P. Morgan Asset Management. Returns are based on total return. Intra-year drops refer to the largest market drops from a peak to a trough during the year. For illustrative purposes only. Returns shown are calendar year returns from 1976 to 2022, over which time period the average annual return was 6.6%. Returns from 1976 to 1989 are calculated on a monthly basis; daily data are used afterward. Guide to the Markets – U.S. Data are as of September 30, 2023.
Resilient economic activity during the third quarter helped spur excitement that the U.S. economy was headed for a “soft landing”. This remains to be seen. You can bet that every little ounce of TV news headlines will be focused on inflation data and its effects on interest rates.
The political landscape is also evolving, and in the coming months, we’ll have a better idea of who the major Presidential candidates will be on stage next year at this time. Prognosticators like to focus on the leading candidates’ public policies and how they can influence various sectors.
In the wake of the recent pullback, we can view this as an opportunity to adjust portfolios. While some asset classes still look expensive, certain others are underappreciated. Especially as the end of 2023 approaches, tax loss harvesting would be prudent during the coming months.
If investors are worried about a possible recession, consider moving into higher-quality stock names. For income investors, look at the short-term rates on safe paper. Many of us can make more in a 1 year CD than the rate we are paying on our mortgage!
More broadly, investors with a globally diversified portfolio and long-term time horizon should continue to remain optimistic. It’s our job (my job!) to help people stay disciplined and opportunistic while doing our best to mitigate taxes and expenses along the way.
Rather than get caught up in the various market moods though, I’d like to share this quote. It’s from Rosamund Stone Zander, The Art of Possibility:
“I am here today to cross the swamp, not to fight all the alligators.”
As the fourth quarter unfolds and the holidays approach, we remain steadfast in helping you make wise financial decisions. If we can further help free you to achieve things that bring meaning to your life, don’t hesitate to reach out.
Disclaimer: This information contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the advisor. The information should not be construed as legal, tax, nor investment advice. Never make investment or financial decisions based on information provided here, without first consulting with your professional investment advisor. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Dow Jones. Data is taken from sources generally believed to be reliable, but no guarantee is given to its accuracy.