In this latest installment of our newsletter, we share our observations of the markets and the economy in the third quarter of 2023. Click here to go to the full report on our website. Following are the highlights:
- The S&P 500 index maintained a strong 13.1% total return through September 30th, 2023, despite recent market volatility. The Bloomberg Barclay’s Aggregate Bond Index, on the other hand, has notched a modestly negative return of 1.2% year-to-date.
- In the third quarter, both indices posted negative total returns, reversing course following two quarters of gains. The S&P 500 posted a negative 3.3% total return in Q3, while the bond index returned negative 3.2% for the quarter.
- Much of the downturn in stocks and bonds came in September, with the S&P down 4.8% and the bond index down 2.5% for the month. This was a rapid reversal for markets, even for the month that is historically the worst for equities.
- A major contributor to the market selloff in Q3 was the rapid rise in Treasury yields since mid-summer. The benchmark 10-year Treasury bond reached its highest yield in nearly 16 years in late September, at nearly 4.6%. This marked a dramatic increase from its yield of 3.75% at the end of June 2023.
- The surge in Treasury yields came in reaction to the Federal Reserve’s latest statement that interest rates may need to stay higher for longer to bring inflation back to its target rate of 2%. This resolve to quell inflation disappointed investors, who had hoped for a quick pivot by the Fed to cut rates in late 2023, after it paused rate hikes in June and September.
- Looking ahead into 2024, investors are currently expecting a half-point reduction in the fed funds rate by late next year, down from the one-point cut anticipated by many earlier in the summer.
- The U.S. economy has remained remarkably resilient during the Fed’s rapid rate-hiking campaign over the last 18 months. Bolstered by a still-robust labor market, solid consumer spending, and-better-than expected corporate earnings, the U.S. economy has so far averted the long-awaited recession that many had predicted for 2023.
- U.S. GDP growth – a key measure of the health of the overall economy – was a solid 2.1% in the second quarter ended June 30th and is now predicted by the Atlanta Fed’s GDPNow model to top 3.5% for the third quarter.
- The labor market also remains seemingly bulletproof. U.S. businesses have added more than 200,000 jobs in each of the last three months, including September’s blow-out number of 336,000 new non-farm payrolls, a massive surprise to the upside from the consensus estimate of 170,000.
- However, inflation remains elevated in the U.S., despite dropping significantly from its recent highpoint in June 2022. The Consumer Price Index, or CPI, which is the broadest measure of inflation, held steady at 3.7% in September, but remained above July’s 3.3% rate for the second month in a row.
- S&P 500 earnings are also projected to be flat year-over-year in Q3, after three straight quarters of declines for the index.
- Global growth has also faltered, with both China and the eurozone facing sputtering economies.
- Given all these uncertainties, our outlook for the economy and markets is mixed. We remain cautiously optimistic on equities but are concerned about the lack of corporate earnings growth this year.
- Longer term, our outlook for earnings growth and the markets remains positive due to several structural tailwinds, including ongoing technological advancements, increasing worker productivity, widening consumer demand globally, as well as breakthroughs in the biotech and healthcare industries.
- In terms of portfolio implications, the market’srecent re-pricing in September and early October has presented some new pockets of opportunity, which we are actively evaluating. The write-up of Schwab in this report is an example of such an opportunity which we identified earlier this year.
- In the meantime, we are still favoring short-term Treasury bonds and money market funds at better than 5% annualized yields for client cash.
The Edgemoor Team
