After a somewhat surprising first six months of the year, the third quarter of 2023 saw the market take a breather. A higher-for-longer narrative from the Fed began to take hold, bringing yields up and major market indices down. For its part, the economy was buoyed by a resilient job market and consistent consumer spending.
Markets Reprice
Major indices fell in Q3, with the S&P 500 down 3.76%, the Dow down 2.65%, and the Nasdaq down 4.32%. Bonds participated in the drawdown, with prices in the Bloomberg US Aggregate falling approximately 3%. Tech stocks, responsible for most of the year-to-date gains, retreated from lofty valuations as AI hype was replaced with the fear of higher real interest rates. While reported earnings remained robust, pessimistic guidance aided in keeping markets from celebrating the quarterly wins.
The Fed Waiting Game
The Federal Reserve began the quarter by raising interest rates, bringing the Fed Funds rate to 5.25-5.50%. Their stance of watching the data and showing patience remains intact, as they kept rates flat at the September meeting. Inflation is showing signs of stickiness, with rising energy prices keeping headline measurements above the Fed’s preferred pace. The labor market is still strong, with unemployment slowly inching off last quarter’s lows. However, the number of job openings continues to decline, and wage growth continues to slow for job switchers. The housing market, long a leader in driving economic growth, is grinding to a halt as affordability nears historic lows. The pace of existing home sales is a clear sign that current mortgage rates are a burden not only for first-time buyers but for those looking to upgrade as well.
Our optimism for the American economy remains strong. Markets have shown that even through rising rates and various political regimes, well-run companies will earn a profit and find ways to grow their businesses. Fixed income markets are offering steady “real” returns, that is actual gains above and beyond inflation, for the first time in many years. Election years promise bumps in the road, but we’ve been through this before. A portfolio diversified with stocks and bonds is still the favored tool to achieve financial goals. Stick with high-quality investments in essential areas of the economy and stay disciplined with your financial plan.
