North River Wealth - 3Q 2023 Market Update

Navigating Turbulent Waters

In the previous quarter, we explored the need for the market to diversify its rally beyond the technology and communication services sectors. Initially, July showed promise with a strong start, only to cool off abruptly, resulting in widespread negative returns throughout the quarter.

In a typical market environment, stocks and bonds tend to have low or even negative correlations. In simpler terms, when stocks perform poorly, bonds usually perform well. Unfortunately, with cooling but still higher than normal inflation, these markets have moved closer together in their performance, leading to negative returns for both stocks and bonds in the third quarter.

Interest rates continued their ascent, with mortgage rates reaching multi-decade highs (hovering around 7.5% as of this writing), and the benchmark US 10-year treasury bond reaching its highest level since 2007 (now at 4.6% as of this writing).

While concerns of a recession persist, characterized by high interest rates, cooling consumer demand, and government shutdowns, there are still compelling reasons to remain optimistic about the US economy, such as a robust labor market, moderating inflation, and a positive growth outlook.

In times of rough seas, we anticipate calmer waters ahead, but the question remains: How long will it take?

Equity Markets 

Large-cap US stocks, as measured by the S&P 500, posted a loss of 3.3% for the quarter, but still maintained a solid year-to-date return of 13.1%. Small-cap US stocks, represented by the Russell 2000, experienced a decline of 5.1% for the quarter but still managed to be up 2.5% for the year.

International markets also faced challenges, with the MSCI EAFE (comprising developed Europe and Asia) declining by 4.0% for the quarter, yet retaining a year-to-date increase of 7.6%, primarily driven by Japanese stocks. The year proved challenging for Chinese stocks, impacted by declining exports, consumer spending, and a shaky property market, resulting in negative returns for Emerging Markets for the quarter (-2.8%) by still positive for the year (+2.2%).

Bond Markets & The Fed

After the Fed hiked interest rates another 0.25% in July (range now 5.25% to 5.50%), the Fed paused in September and kept interest rates steady. Although this is typically met with a positive reaction, it failed to provide relief as the Fed signaled its intention to keep short-term interest rates higher than initially expected. This caused interest rates across the US Treasury curve to increase leading to a negative return of 3.2% for US Fixed Income as represented by the Bloomberg US Aggregate index (when interest rates increase, the value of bonds falls, hence the negative returns in fixed income markets).

That said, the market is still anticipating interest rate cuts by the Fed next year (potentially 2-4 rate cuts) which will decrease the returns you are getting from your savings accounts, but also decrease borrowing costs.

Strength of the US Dollar ($)

Despite rising interest rates, the US dollar appreciated against several major developed currencies, including the British pound, Japanese yen, and euro. The US dollar has long been a reserve currency, making it the preferred choice for transactions and a safe haven for investors, both domestically and abroad.

A stronger dollar benefits US consumers by making overseas goods and services more affordable and offers opportunities for cost-effective travel (hello European vacation!). The downside of the stronger dollar is many large US companies drive profits outside of the US which can cause profits to decrease or have multi-national investors look for other currencies to use, potentially driving $ demand lower.

Outlook

Markets are not linear. They do not always go up. Making impulsive decisions based on emotions rarely proves advantageous.

Bonds don’t have positive returns when we see a sharp increase in yields (bond prices go down), but this does give a more constructive outlook for bonds in the future, particularly as inflation cools and the Fed begins to cut interest rates.

While we are certainly not ones to make predictions based on historical data, the fourth quarter has traditionally been a strong quarter for equity markets. Despite facing several headwinds, including rising rates, inflation concerns, and growth uncertainties, markets have generally shrugged off negative news throughout the year. Although a small number of stocks have been driving most of the gains, there remains ample potential for market expansion.

Nevertheless, markets could continue to experience the pullback witnessed in the third quarter, possibly inching closer to a mild recession in 2024. This underscores the importance of understanding your investment time horizon.

We serve a diverse clientele, including younger individuals with decades until retirement, as well as retirees with a more conservative approach. This underscores the necessity of assessing your time horizon and risk tolerance.

Stay patient, and focus on what you can control.

Authored by Stephen Blahovec and Michael Rausch of North River Wealth Advisors.  We are an independent, fee-only financial planning and investment management firm located in Pittsburgh, PA servicing clients locally and across the country.  To learn more, contact us here.

This content is developed by North River Wealth Advisors from sources believed to be providing accurate information. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.