Category: Insights

I hope you are enjoying these last few months of the year! As we head into the final stretch of 2023, here is a review of the third quarter’s key market and economic developments. 

S&P 500: A Breather After Three Straight Positive Quarters 

Overall, stock market bulls were on the retreat during the third quarter of 2023 as several major stock indexes traded lower in response to rising interest rates and a strong dollar. 

In fact, after three consecutive positive quarters for the S&P 500, the large-cap index found some sellers in the third quarter. Utilities and real estate contributed to the selling, while the energy sector surged on the back of higher oil prices.  

Tallying the numbers, the S&P 500 decreased by 3.65%, the Nasdaq 100 fell by 3.06%, and the Dow Jones Industrial Average fell by 2.62%. 

Economy: Soft or Hard Landing?

Rising interest rates and stubborn inflation remain front and center. The Federal Reserve has clearly communicated its “higher for longer” expectations on interest rates, and the message is starting to sink into the markets.  

A recession induced by a rate-hiking Fed and pesky inflation is still a distinct possibility. Interest rates rose steadily across various durations and products throughout the quarter, and a tighter lending environment is a factor in the financial markets. 

Inflation Mixed for Quarter, Ticks Higher 

Inflation metrics were mixed in the third quarter, with consumer inflation reversing its previous downward trend and picking up in August and September data releases. 

The last Consumer Price Index (CPI) release of the quarter showed a 3.7% rise year-over-year in August versus 3.6% expected. This was much higher than the 3.2% rise year-over-year in July. The recent uptick in headline consumer inflation helps to support the higher-for-longer interest rate narrative that the Fed is broadcasting. 

Core CPI (which removes volatile food and energy) ran a little hot in August but remains in its downtrend for 2023, providing a mixed theme on inflation. 

With that said, we don’t need to be economists to realize that food and energy are the things that are hurting our pockets.

Fed Summary & Outlook 

The third quarter featured two Federal Reserve meetings, with the Fed raising rates by 25 basis points in July and leaving rates unchanged at the September meeting. The result is a current target overnight lending rate of 5.25 – 5.50%, a 22-year high. 

While the Fed left rates unchanged at the most recent meeting, it did let us know that policy could remain “restrictive”. The Fed also indicated it would need to see more evidence that inflation is under control for these restrictive levels to be changed. 

The consensus at the start of the fourth quarter is that there will be one more hike in 2023. The Fed is heavily data-dependent, so probabilities may shift over this quarter in relation to key data releases. 

Looking Ahead 

It was an eventful quarter in the financial markets, and it is still a highly Fed-centric market, with any clues presented by labor and inflation data being front-and-center.   

Investors may have to get used to higher rates, potentially even higher than present levels based on historical patterns. The good news is that the fourth quarter is historically the best quarter for stocks. Time will tell if that pattern holds true this year.  

With that said, if there are any third-quarter market developments on your mind, or if there is anything else I can help with, please feel free to reach out to our team. We are always here as a resource for you. 

Take Care,

Andrew Fairman, CFA, CFP®

Chief Investment Officer

I hope you are doing well and enjoying your summer. With Q2 2023 in the books, below is an overview of the markets, the economy, and other key themes that dominated the last three months. 

Monthly Themes

Entering the second half of the year, here is a recap of monthly themes in Q2: 

• Major U.S. stock indexes traded lower in April as markets braced for additional interest rate hikes; overall prices consolidated in then-recent monthly ranges. 
• May saw technology break out of recent trading ranges, with the Nasdaq surging. 
• Then there was June, when the rally started to broaden, featuring a breakout by the broad-based stock index, the S&P 500. 

S&P 500: Make It Three Consecutive Positive Quarters 

Let’s make it three for the S&P! The second quarter of 2023 was the third consecutive positive quarter for the S&P 500 and the Dow Jones Industrial Average. The Nasdaq 100 was the biggest gainer of the three major indexes in the second quarter, with Artificial Intelligence stocks and large-cap tech fueling gains. 

For the second quarter of 2023, the S&P 500 increased by 8.30%, the Nasdaq 100 rose by a whopping 15.16%, and the Dow Jones Industrial Average saw an uptick of 3.41%. 

Economy 

Investors shook off the banking turmoil that was front and center in the first quarter.  

A Federal Reserve-induced recession is still a possibility, as interest rates remain elevated, and tightening credit conditions are making their way through the markets. However, that did not come to pass in the second quarter, as major U.S. stock indexes traded positively.  

Inflation

Inflation metrics continued to decline in the second quarter, with the last Consumer Price Index data showing monthly consumer pricing declining in May from April levels. 

Year-over-year, inflation slowed to a 4.0% rise. In comparison, the year-over-year metric just a few months ago was 6.0%. That’s an impressive decline. We expect CPI to continue to fall to 3.2% over the next couple of months due to higher monthly readings from 2022 that will fall off the year-over-year readings.  

Core CPI (which removes food and energy) remains firm, potentially backing the Fed’s case for additional rate hikes. U.S. equities loved seeing headline inflation metrics tick lower throughout the second quarter, however. 

Labor Market

Strength persisted in labor markets throughout the second quarter, with solid payroll gains (253,000 in April and 339,000 in May), both numbers beating analyst consensus expectations. This is an indication of newly created jobs added that didn’t exist prior, a signal of economic strength.  

In April, the unemployment rate tied for the lowest level since 1969, at 3.4% vs. 3.6% estimates. For May, the unemployment rate rose to 3.7%, higher than the estimate of 3.5%. Perhaps this was a factor in the Fed not raising rates in June. 

As inflation readings decline, it is natural to expect some slowing in the labor market, according to conventional wisdom. As of the second quarter, the labor markets remain steady overall. America’s labor shortage is real. 

Quarterly Federal Reserve (Fed) Actions 

The second quarter featured a 25-basis-point hike in May and no hike at the June meeting, with the Fed taking a breather after ten consecutive rate hikes.  

The third quarter brings two Fed meetings: July 26th and September 30th. The Fed has indicated two more hikes for 2023, and many analysts seem to agree. The July meeting may bring one of those hikes. 

Putting Q2 Together 

Active participants are currently debating whether the market is getting ahead of itself, given some of the macroeconomic headwinds. But these same folks more than likely missed this recent stock market rally. This is a big reason to be a long-term investor: timing the market is very difficult, and many get left behind.  

Remaining focused on the long term allows an investor to avoid getting caught up in quickly changing narratives that could trigger emotional decisions.  

With that said, if second-quarter market developments are on your mind, or if there is anything else I can help with, please do not hesitate to reach out! 

Take Care,

Andrew Fairman, CFA, CFP®

Chief Investment Officer

It was a remarkable Q1 for 2023, and many questions now exist about the financial markets and the economy at large. 

With that in mind, below is a summary of some of the key developments to keep in mind as the second quarter begins in earnest. 

Economy

Some cracks in the economy became evident during the first quarter, with banking system uncertainty in the spotlight. The banking turmoil towards the end of the quarter rightfully rattled investors and sent volatility soaring. 

However, the market volatility was short-lived, as the first quarter concluded with buyers emerging in major U.S. stock indexes.

S&P 500: Two Consecutive Positive Quarters

The first quarter of 2023 was the second consecutive positive quarter for the S&P 500 and the Dow Jones Industrial Average. The Nasdaq 100 had the biggest gain of the three major indexes after experiencing a slightly lower fourth quarter of 2022.

Overall, during the first quarter of 2023, the S&P 500 increased by 7.03%, the Nasdaq 100 rose by a mammoth 20.49%, and the Dow Jones Industrial Average was marginally higher, by 0.38%.

Labor Market

In the first quarter, strength continued for the labor market, with solid payroll gains of 311,000 in February & 517,000 in January. The unemployment rate did edge higher in February (from 3.4% to 3.6%), but the labor force participation rate was little changed at 62.5 % in February.

U.S. Federal Reserve Governor Christopher Waller said in late March that inflation could decrease without harming the labor market.

Inflation

The quarter’s last Consumer Price Index (CPI) data release showed consumer pricing declining in February from January levels. However, prices remained elevated. Core CPI (which removes volatile food and energy) remains firm—potentially firmer than the Federal Reserve would like to see. 

The inflation battle has resulted in the fastest pace of Federal Reserve rate hikes in decades.

Quarterly Fed Decisions 

The first quarter featured one Fed meeting in March, resulting in a 25-basis-point hike. The hike was largely expected, although some participants wanted to see a pause in the wake of the banking turmoil. The second quarter features two Fed meetings on May 3rd and June 14th, with continued rate hikes possible. 

Putting Q1 Together

Starting out 2023, the Nasdaq had its best January since 2001, a welcome way to start the year and quarter.

Major U.S. stock indexes traded lower in February as markets braced for additional interest rate hikes and economic headwinds were in focus. And March had it all: banking turmoil, a spike in volatility, and ultimately, a rally in the major U.S. stock indexes.

At the close of the first quarter, market expectations seemingly shifted towards a more gentle Fed for the remainder of 2023, with one more rate hike being the consensus. The Fed has also forecasted one more rate hike.

Active market participants are currently debating whether the market is getting ahead of itself, with some expecting rate cuts later in the year, even as the Fed suggests that will not be the case.

Amid all of this first-quarter speculation and turmoil, remaining focused on the long term became all the more important. A long-term focus prevents investors from getting caught up in quickly changing narratives that could trigger emotional decisions.  

With that said, if you have questions about first-quarter developments or if there is anything we can help with, please do not hesitate to reach out! 

Regards,

I believe it goes without saying that putting 2022 in the rear-view mirror could not have come quick enough. Difficulty in financial markets, the economy as well as geopolitical tensions have weighed heavy on the minds of many over the last 12 months. 

The S&P 500 Index was down over 18% and bonds, which typically do well when equities decline, were also down over 12% for the year due mostly to the Federal Reserve hiking interest rates to combat inflation. There were few places to hide from declining asset prices and rising consumer costs in 2022. 

Fortunately, inflation as measured by the headline Consumer Price Index (CPI), which peaked at close to 9% year-over-year in June of 2022, has been in a downtrend and finished the year at 6.4%. 

Further, these year-over-year CPI figures are somewhat misleading as they still contain the readings for the high inflation months of early last year. This is what is referred to as “base effects” and, as the high inflation months fall off the year-over-year readings, you should expect to see the headline CPI data begin to moderate downward toward the Federal Reserve’s target of around 2%. It should be noted though, that we may not reach the Fed’s desired target until 2024 or later. 

Looking forward to 2023, I am somewhat optimistic that stocks and bonds are in a position to recoup some of the losses from 2022. I say this in spite of the fact that I believe we will likely have a recession here in the US in 2023.  

First, with the yield on the Bloomberg Barclays US Aggregate Bond Index (the Agg) currently over 4.6% and the Federal Reserve presumably closer to the end of hiking rates, we should be able to generate some decent income on bonds moving forward. As a reference, the yield on the Agg index at the start of last year was 1.75%. Additionally, investors typically move to the relative safety of bonds relative to stocks when the economy softens. 

As far as stocks in 2023, we’re off to a decent start, up over 6% year-to-date as of January 30th. While this is welcome news for investors, I believe we will experience some choppiness in the markets for the near-term. 

As mentioned previously, inflation appears headed in the right direction and the Fed is closer to the end of rate hikes after raising interest rates a total of 7 times in 2022, but if these don’t continue in the right direction we could see some more volatility and drawdowns in the stock market. 

The Fed is also in a precarious position in that they are trying to tame inflation by slowing the economy, but they also run the risk of tightening economic conditions too much and causing a painful recession. As of now, the general market consensus is for a short and shallow recession sometime in 2023, but there is still a risk that if conditions deteriorate faster than the Fed anticipates, we could see something more severe than that consensus scenario. 

The good news for stocks though is that they typically bottom and begin to rise before the end of a recession. As forward-looking mechanisms, markets fall in advance of deteriorating economic conditions and begin to rebound once the extent of the economic damage is done. This is also the reason why, historically, the best time(s) to invest have been when the economy feels the worst in real time. 

With that said, we don’t attempt to time these inflection points in markets when investing on behalf of our clients. Attempting to do so has proven to be statistically a near impossibility with the risk of hurting investment returns by doing so. 

Instead, we stick to our time-tested approach of thoughtfully allocating and diversifying into asset classes and investments with a history of appreciation and a focus on the long-term.  We believe this consistent approach gives our advisors the ability to confidently guide our clients to and through retirement. 

Here’s to hoping 2023 is a prosperous one!

We hear you. You, like most investors today, are very concerned about market volatility and falling account values. Should I be selling to protect my retirement,  you may ask?

You are not alone. Turbulent markets and geopolitical uncertainty can be stressful, and we can’t exactly predict when all this volatility will begin to moderate.

What I can say with some certainty is that it won’t last forever and that markets will begin to recover before the economy is flashing “all clear.” This is because stock markets tend to be “leading indicators” and move directionally anywhere between 6 to 12 months ahead of the overall economy.

The most recent example of this phenomenon was in early 2020, when, as the world economy was shutting down due to Covid-19, the S&P 500 began a bull run that erased the 34% year-to-date decline and even finished the year positive almost 20%. Markets do funny things.

Below is a chart from J.P. Morgan that I’ve shared before, but it is worth showing again:

Declines in the market are a part of long-term investing and not an indication that markets are broken. The red dots indicate the intra-year percent decline going back to 1980 and the gray bars indicate where the calendar year ended.

Here is another graphic from First Trust that shows the historical length of bull and bear markets:

Going back to 1942, there have been 15 bear markets lasting an average of 11.1 months. We are currently heading into month 9 of the current decline and could be at 11 months by Christmas.

Could it last another 11 months? Sure. Could we have already hit the bottom given the first few positive days of trading in October? Sure.

But here’s the thing about investing for a time horizon longer than 11 months. You don’t need to time these bear markets to be successful at investing for the long term. Bull markets have historically lasted 4 times as long as the typical bear market.

So, if you’re considering selling today and investing in something “safer,” the odds are against you that you will perform better than a diversified portfolio over the intermediate to long term.

And if you say to yourself that I will get back into the market when the economy feels like it’s on better footing, the odds are that the market has already anticipated that well in advance.

In my opinion there is a bright silver lining to all that we’ve been through in the markets in 2022.

First, while bonds have taken it on the chin this year because of higher interest rates, the yields that bonds pay are now higher as a result. The best predictor of future bond returns is the starting yield so our outlook for bond returns hasn’t been this bright in over a decade.

And for stocks, we can’t change what has happened year-to-date but right now is unequivocally a better time to be buying and owning stocks than any other time in 2022. As stock prices go down, future expected returns go up. Are we at the bottom? Maybe so or maybe not. But are the chances good that we will be happy that we were invested in the markets 3, 5, or 10 years down the road? I like those odds.

Looking for more commentary about 2022 markets? Check out these other posts:

My goal is to give you a brief mid-year market commentary for 2022 and provide some insight into what I’ll be watching and following over the next few months. 

Frankly, the first half of 2022 has not been enjoyable if you’re an investor. The S&P 500 (a broad measure of US stocks) is lower by more than 20% and the BloombergBarclays US Aggregate Bond Index (a measure of investment grade bonds) is lower by more than 12%. 

The fact that both indexes are down so much and at the same time is extremely uncommon. We all know that financial assets are subject to downside risks, but that certainly doesn’t make times like these any easier. It’s felt in our account statements and the prices we pay at the pump or at grocery store.

On the minds of most investors these days is inflation and whether it is here to stay. Investors were caught off-guard earlier this month when the CPI (consumer price index) data for the month of May came in higher than expected. Consumer prices increased 1% in May vs. 0.3% in April and above economists’ estimates. 

I would highly encourage you to take these single data points with a grain of salt and instead follow the longer-term trends as a better indicator of direction. Temporary factors and a relatively small sample size can create a lot of statistical noise which influences the output of the data. 

The crystal ball I ordered is still on a container ship somewhere in the Pacific, but I’m confident inflation won’t be at these levels forever. The bad news is that it won’t be an overnight process to normalize and it’s going to take some natural economic healing and Fed action to make this happen. 

As you may know, the Federal Reserve opted to raise the Fed Funds Rate by 75 basis points or 0.75% at last week’s meeting. This action is meant to slow down economic activity with the intention of cooling inflation. The main risk to this action is that they could unintentionally throw our economy into a recession if it cools too much. It is my opinion that they are walking a fine line and only time will tell if they are successful at bringing down inflation while avoiding a recession. 

As investors, we don’t have control over the economy or Fed policy, but times like these do give us some opportunities. For instance, in taxable accounts we are actively looking to capture capital losses for which clients can use to offset a portion of income as well as carry-forward these losses to offset future capital gains. This opportunity allows us to improve after-tax returns when markets ultimately improve. 

Additionally, we are looking to rebalance portfolios that have drifted from their target investment weights. I view this operation as a risk management technique that ultimately allows us to buy low and sell high and takes the emotion out of investment decision making. Rebalancing also has been proven to lower portfolio volatility and adding to return relative to a “buy and hold” strategy. 

Which brings up another opportunity these types of markets create. Now is a great time to, if you haven’t already, have a discussion with your financial advisor to revisit your goals and priorities. As humans, volatile markets have the ability to trigger a negative emotional response, but working with an advisor to help you get through the rough times and keep the focus on the long-term can be invaluable.

It was the best of times, it was the worst of times. This is what the past several years have felt like. Markets reached the Covid bottom on March 23, 2020. For two straight years we experienced nothing but market bliss while simultaneously having daily life turned upside down. Today, it feels as though stocks and bonds have nowhere to go but further down. 

At the start of 2022, some markets were at an all time high. That was a very short time ago. Let’s stop to think about what that means. It means that markets have recovered from every single negative US and world event in history. I can list, and I am sure you can too, many historical events that were far worse than the Federal Reserve raising interest rates to fight inflation. 

To start this year, a reality check has reminded us what risk looks like on the way down. Speculative (or risky) assets have become extremely popular over the last two years, which is typical in extremely bullish periods. Unprofitable companies, Non Fungible Tokens (NFTs), SPACs, and speculative money managers were all soaring. However, investing money into companies or ideas that only have a nice story can produce devastating results. One example is the investment ETF (exchange traded fund) ARKK. It has reached notoriety across financial media and gained substantial popularity. According to its prospectus, it invests in companies with an investment theme of “disruptive innovation.”  The fund performed unbelievably through the pandemic…until it didn’t. Here is a look at the fund over the past five years relative to the S&P500. It is an example of what high risk looks like and has given up all outperformance to the S&P 500 over a five-year period.

Here is what the comparison looks like if you happened to jump on the bandwagon too late, after the investment soared. It is down 60% in the last six months as of May 23, 2022. 

As advisers, we continuously discuss our investment strategies with clients to understand how we are invested, and work to align those strategies with financial goals. We believe businesses with quality cashflows and earnings, and bonds with interest payments backed by strong credit ratings create a high likelihood of long-term success. 

As markets reach fresh lows and volatility remains high, take a step back to revisit your long-term plan with your advisor. Understand that asset drawdowns are a normal part of a long-term successful course. The Warren Buffet wisdom of being greedy while others are fearful is easier said than done, because fear rises during uncertainty and troubling time periods. As we work through this challenging time, never hesitate to reach out to your advisor, as we are here to serve the clients of SBC.

The information provided in this post is being provided for educational and informational purposes only and should not be considered an individualized recommendation or personalized investment advice.  Those seeking information regarding their individual financial needs should consult a financial professional.  Opinions expressed are current as of the day of posting but are subject to change without notice based upon changing market, economic, political, or social conditions.  All information is from sources deemed to be reliable, but no warranty is made as to its accuracy or completeness.  SBC, our employees, or our clients, may or may not be invested in any individual securities or market segments discussed in this material.  Past performance is no guarantee of future results and any opinions presented can not be viewed as an indicator of future performance.  Investing involves risk, including loss of principal.