11 Oct Investment Commentary – 3Q 2023
September market review
Throughout the run of the Federal Reserve’s (Fed) inflation-fighting, rate-raising program, the equity market has shown uncommon enthusiasm supported by a growing economy, a strong labor market and healthy consumer spending. Contrary to the expected way of these things, inflation continued to cool even as the economy and the markets remained hot.
However, in September, “We believe the economic cycle may be reaching an inflection point,” Raymond James Chief Investment Officer Larry Adam said. “The S&P 500 had its second-best start to a year since 1997, and we’ve warned that equity markets were due for a pullback. Our view is that the economy is slowing, not imploding.”
Inflation remains persistently higher than the Fed’s 2% target. And while the Fed declined to raise interest rates at its September meeting, it left the door open for another rate increase by the end of the year.
A potential government shutdown, softer consumer confidence, a slowdown in home sales and home starts, higher oil prices, persistent inflation and the Fed’s message that the fed fund’s rate will be higher for longer combined to bring the S&P 500 down 4.87% for the month.
We’ll dive into some of these details, but first let’s review the year-to-date results:
|12/30/22 Close||9/29/23 Close*||Change
Year to Date
|% Gain/Loss Year to Date|
|Bloomberg Aggregate Bond||2,048.73||2,024.02||-24.71||-1.21|
|*Performance reflects index values as of market close on Sept. 29, 2023.|
Congress reaches last minute funding deal
By the end of the month, uncertainty about whether Congress would meet the October 1 deadline to fund the government for fiscal year 2024 without interruption faded into near certainty that a shutdown was imminent. However, a compromise deal approved in the final hours in the fiscal year created a 45-day stopgap. Significant challenges lie in the path of a longer-term funding bill, but this measure suggests they are not insurmountable.
Treasury yields surge on Fed’s words
The 10-year Treasury yield remained elevated through September and hit a 15-year high after the Fed’s steadfast language suggested it would keep interest rates higher for longer than investors have expected. Compared to August, rates for notes beyond seven years were up 40-49 basis points while two-year rates went up 19 basis points and five-year rates increased 34 basis points. “Higher for longer” interest rates are expected to weigh on the economy but have also created opportunities to lock in elevated yields.
Suppliers’ discipline pushes oil higher
Oil prices ended September above $90 a barrel, a 10-month high, demonstrating that the macroeconomic backdrop is not everything. While there is no escaping worldwide weak economic headlines creating headwinds for oil demand, the supply side of the equation is currently driving prices. The OPEC+ group, led by Saudi Arabia and Russia, is actively curtailing oil supply, and for longer than originally expected. OPEC+ has been disciplined with supply from the first days of the COVID-19 pandemic, and even with global demand having surpassed pre-COVID levels, that discipline remains visible.
Britain and EU reach potential interest rate plateaus
While avoiding being boxed in by statements claiming their aggressive interest rate raising strategies have reached a “keep high and hold” stage, the positions of both the Bank of England and European Central Bank were similarly hawkish as the U.S.’s Federal Reserve as they adopted no change to their current, heightened rate in the U.K., and a quarter-percentage point raise in a single currency area in the euro zone
Japanese markets suggest ending of “ultra-easy” money
Financial market pricing suggests the Bank of Japan may end its 16-year run of negative interest rates as part of its “ultra-easy” monetary policy stance. If Japan is going to depart from its long-held policy position it seems unlikely before January, at the earliest. Given that local financial institutions are nursing losses on local sovereign bond holdings, any further adjustment in the country’s monetary policy position is thought more dependent on any offsetting moves in the stock market than on inflation’s future pathway.
The bottom line
September saw some investors’ hopes for a “soft landing” – a corrective to inflation without a recessionary side effect – challenged, pulling air out of the equity market. Though the economy and labor market remained strong in the third quarter, data continue to suggest a mild recession in the first half of 2024.
I expect volatile conditions to continue into the fourth quarter, but my overall outlook remains positive. As long-term investors, down markets present opportunities to acquire high-quality assets.
I am honored to have earned your trust as we pursue your financial goals together. If you have any questions about your portfolio, financial plan or wish to discuss the movement of the market, please reach out at your earliest convenience.
Richard H. Wagener
Managing Partner, Wagener-Lee, LLC
Branch Manager, RJFS
Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the authors and are subject to change. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australasia and Far East) index is an unmanaged index that is generally considered representative of the international stock market. The Russell 2000 is an unmanaged index of small-cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. An investment cannot be made in these indexes. The performance mentioned does not include fees and charges, which would reduce an investor’s returns. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in oil involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors. U.S. government bonds and Treasury notes are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury notes are certificates reflecting intermediate-term (2 – 10 years) obligations of the U.S. government.
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