Morning Market Commentary Q3 2023
Investors began the third quarter of 2023 focusing on the potential peak in interest rates, the robust rally from the bottom of the stock market, and renewed optimism of a soft landing derived from trends of cooling inflation and economic growth. However, as rates continued to rise from a hawkish Fed, both the bond and equity markets have since responded by reversing the prior nine months of positive return trends.
S&P, Dow, and NASDAQ
The S&P 500 and NASDAQ experienced their first quarterly declines in 2023, with the brunt of the fall coming from the [historically] worst-performing month of the year, September. The Dow Jones Industrial Average (.DJI) dropped roughly 2.6%, the S&P 500 (.SPX) declined 3.6%, and the NASDAQ shed 4.1% for the quarter.
A Change in the Climate
What do the climate and the markets have in common? Both got off to a hot start this summer but eventually cooled off as we began to head into the next fiscal quarter. Value stocks for this quarter were resilient, declining -1.7% in comparison to the return of -4.9% in their growth counterparts. Still, growth has outperformed value by over 18% this year. As for bonds, additional losses were incurred, with the global aggregate bond benchmark falling by -3.6% this quarter. Sticky inflation, combined with unprecedented government spending, and quantitative tightening from the Fed, have pushed yields higher and bond prices lower.
Expectations Tempered
At the beginning of Q3, the Jackson Hole Summit took place, and the world’s central bankers quickly turned “the summit” into the falling action for the markets. Despite the year-to-date returns being up a modest 11.6% for 2023, investors were instructed to pay attention to key concerns that are still present in the economy. Among ungovernable fiscal spending, slowing economic growth, and a looming recession, the biggest and most pressing topic is related to a phrase the Fed would like everyone to have in their vocabulary: higher for longer. Interestingly enough, the Fed’s most recent guidance warns us about the possibility of another rate hike for 2023, followed by fewer cuts heading into next year. Although there is an array of positive news surrounding core inflation data, consumer behavior sentiment, and labor market conditions to name a few, the Fed is still seemingly a long shot away from victory on the once-declared ‘transitory’ inflation that accelerated in 2021.
Outlook for 2023 and Beyond
2023 has exceeded expectations of Analysts’ forecasts and the major research firms they support. However, despite heightened speculation of a “soft landing”, the risk of a recession and persistent inflation is still a very real concern. Headwinds from restrictive monetary policy continue to prevent domestic and global economies from justifying elevated valuations in the markets, ultimately leading to continued volatility. One key data point worth considering is the personal consumption expenditures (PCE) price index. The Fed evaluates the PCE price indexes for its 2% inflation target. On an annual basis for August, this metric increased just 3.9%, which was the first time in over two years it had fallen below 4%.
While 2023 has given us a rally in both stocks and bonds, the recent setbacks prove that staying invested for the long term is as important as ever.
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