In our quarterly Economic & Market Update Newsletter, we separate the relevant from the noise, to bring you timely content that helps you on the path to and through retirement!
September Commentary & 3rd Quarter 2023 Recap
Stock Market Update
The optimism around artificial intelligence (AI) led to a strong recovery in markets through mid-summer, but then reality hit in August as investors started to believe that interest rates would remain higher for longer. September was a particularly rough month for markets. In the 3rd quarter, the S&P 500 fell about 3.6%, the Dow lost 2.6%, and the Nasdaq shed 4.1%.
2023 has been one of the most confusing times to be an investor. On the one hand, the emergence of AI and the opportunities to benefit from this new technology has been called a new industrial revolution. We are just in the early stages of a new AI capital spending boom that could see big gains in productivity and profit margins for a variety of businesses. As a result, many large cap growth stocks, especially technology stocks, have seen their stock price soar this year. Most of the rest of the stock market, especially value stocks, are trading as if we are already in a recession.
The continued rising interest rate environment has been having the intended impact: clamping down inflation by slowing growth. But it looks like it’s going to be difficult for the Fed to “thread the needle” and it appears increasingly likely that the U.S. economy will enter a recession in 2024.
Reasons for caution abound: Americans have burned through most of their excess cash, the U.S. manufacturing sector appears to have been in a recession for the last year, delinquencies on credit cards and auto-loans are accelerating, corporate defaults and bankruptcies are on the rise, and residential real estate has had a negative contribution to GDP for nine consecutive quarters. Student loan payments have resumed, which should noticeably reduce consumer spending.
Another troubling sign is that Americans are still spending more than the rate of inflation. Americans spent 5.8% more in August this year, compared to a year earlier, which outpaced inflation at 4%. If Americans believe inflation will remain high, they’ll keep spending more now, and this spending feedback loop will make it hard for the Fed to bring inflation down to target levels.
Bond Market Update
Bonds have also struggled this year as the Fed has continued to raise interest rates and investors now believe rates will stay higher for longer. The bond market is now on pace for 3 consecutive years of losses. The bright spot in the bond market is that bond yields are appealing again, and savers are rewarded with attractive yields on savings and money market funds.
So, what is an investor to do? The most important thing in this type of economic climate is to manage risk. We have been locking in higher yields in client portfolios with short and intermediate term bonds and CDs. Yields on these bonds and CDs are very attractive – at or above 5% in most cases. We are also evaluating asset allocation in client portfolios and rebalancing where necessary.
In stock portfolios, we are planning for the unexpected by continuing to focus on quality and dividend growth stocks. Dividend growth and value stocks have been hit harder than the overall market this year, but their short-term underperformance doesn’t diminish their appeal for long-term investors.
The Bottom Line…
Several troubling signs point to a recession ahead in the next year. With the Fed near the end of its rate hike cycle, we believe it’s a good time to start locking in attractive yields. Stocks may show further weakness from here, but as opportunities in AI become reality, it could be the green shoot the U.S. economy needs to avoid a serious downturn.