Portfolio Research Director, Kevin E. Donovan, CFA, and Senior Financial Adviser, Parker G. Trasborg, CFP®, discuss markets for the third quarter 2023.
Parker G. Trasborg:
Hi, I’m Parker Trasborg, Senior Financial Adviser with CJM Wealth Advisers, and today again we’ve got Kevin Donovan, our Portfolio Research Director, for our October 2023 market update. Kevin, markets started the third quarter okay, and then sold off starting late August into September. What happened?
Kevin E. Donovan:
Yeah, it was a disappointing last two months of the quarter there in August and September. Basically, it was all again, once again driven by expectations about the Fed and the market’s rethinking about what it expected the Fed to do in terms of will it raise interest rates or keep them high? Or when they’re going to eventually stop raising interest rates and lower them. So, let’s look at the first chart here, and this shows the 10-year yield on the treasury bond.
Now, a lot of things feed into the 10-year yield, and I want to focus on a few things, though, for this quarter. One is that inflation was down significantly from last year, but lately it’s come in just slightly above what the market expected. When you combine that with economic growth being a little better than expected, that caused yields to rise, because the thinking of the market is this may give the Fed room to increase rates even more as they continue to fight inflation. So, the inflation remains above the Fed’s target of 2%. And you can see here at the beginning of the quarter, the 10-year yield was at about 3.8% and ended at about 4.6%. It trended higher in August and then it really took off in September. So, that 3.8% to 4.6% increase is actually a 20% increase in the 10-year yield, a fairly significant increase in a short amount of time.
So, the concern is that the battle against inflation isn’t over and that the Fed may have more work to do, and if they do have to do more work and raise more interest rates, that will restrain the economy and may end up to an economic slowdown. So, if you look at the major market indexes and how they performed in the third quarter, which is pretty much opposite of the 10-year yield. We already saw the yield trending higher in August. We can see the indexes trending lower in that month, and when the yields finally took off pretty strongly in September, we can see that the market’s sold off pretty sharply in the last two weeks or so of September. So, what we ended up with were losses across the board.
The Dow was down about 2.6%. The S&P 500 was down about 3.7, and international stocks were down about 4.7, as the dollars strengthened. Bonds were down about 3.2%. Bond prices fall as yields rise, so everything ended up in the negative column. What we did see, though, was growth stocks and value stocks perform about equally in the third quarter.
If we shift to the next slide on the year-to-date performance with indexes, you can see that the S&P 500 year-to-date is still up a significant or a healthy amount, 11.7%. Now, that is helped a lot by the strength in some of the very large tech companies earlier in the year. With the AI boom, those companies took off, but for the rest of the market, we haven’t really seen that kind of an increase. And you can see the Dow is only up 1.1% this year, so it’s fairly positive this year. International stocks are doing okay, made single digits, about 4.5%, and bonds are down about 1.2%. So, not a great quarter by any stretch to the imagination, but year-to-date for the equity markets, we’re still positive, and bonds are slightly low.
Parker G. Trasborg:
Thank you. Tough quarter. Heading into the year, everyone was expecting a recession to happen. Here we are now in October and we haven’t seen that so far. What’s the thinking around that at this point, Kevin?
Kevin E. Donovan:
Yeah, well, market expectations have been wrong about yields, they’ve been wrong about the recession. So, the economy is stronger than expected. We don’t expect a recession in the rest of this year. There’s only one quarter left. There are still big banks out there who are calling for, they see a recession next year. Others were saying “We’re going to see a soft landing, we just don’t know.” Right now, it hinges upon inflation and if we do see an uptick in inflation, how aggressive the Fed may be in responding to that. If they push yields too high, will that cause the economy to contract by too much? It’s up in the air right now.
Parker G. Trasborg:
Thanks. Well, again, that’s all the time for today. We’ll continue to keep an eye on and monitor the situation as things are progressing on a day-to-day basis, depending on what data has been coming out. Thank you for joining us, Kevin, and we will see you next time for our end of year update in January next year. Bye-bye.
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