Q3 2023

Dear Client,

The leaves are changing, there is football on TV, and Costco is selling Christmas trees.  It must be October.  Those of us working in financial markets are looking toward year-end and expected earnings and economic trends for next year.  As you begin to look toward the holiday season, please spare a moment to consider your finances and investments. We are working on getting RMD’s completed for those of you for whom that is relevant. If you have questions or need to get contributions done before the end of the year, please get in touch.    We would be happy to make time to discuss your accounts or financial planning.

After a strong July, the trend in August was lower, and September continued lower still in the equity markets.  Meanwhile, the Ten-year Treasury bond rocketed higher, reaching levels not seen since 2007.  Oil climbed significantly higher as well while Gold drifted a bit lower.  The Federal Reserve announced a pause in the interest rate hiking cycle, but the message was that it was a pause and that at the least we should expect rates to stay at their lofty levels for an extended period.

The index numbers for the quarter are as follows (calculated from wsj.com/market-data): 

S&P 500 change: -3.65% Q3

S&P 500 Equal Weight Index: -5.38% Q3

Nasdaq Composite change: -4.2% Q3

Nasdaq Composite Equal Weight Index: -2.6 Q3   

Dow Jones Industrial Average change: -2.51% Q3  

Ten Year Treasury Yield change: 18.35% Q3

Crude Oil (WTI Front Month Contract) change: 28.81% Q3 

Gold (GLD ETF) change: -4.01% Q3

One thing that stood out to us in the index data this quarter was the redistribution of the Nasdaq.  Among the largest 10 stocks in the Nasdaq, the concentration decreased significantly.  The change brought the allocation to the lowest level for those top 10 in the last several years.  It is still incredibly concentrated, with 34% in the top 5 and 48% in the top 10, but it is interesting to see the balance shifting, at least temporarily away from the ten largest stocks.  Another notable data point was the large rise in the Ten-year Treasury yield.  As we write, the yield on that bond has reached 4.75%.  That level and any potential further increase is an astonishing rise both in terms of the speed of change and the absolute levels being reached.  In our opinion, that increase is primarily to blame for the unrest in the markets recently.  The Ten-year treasury bond is considered a proxy for inflation expectations, can be an input in the valuation formula for equities, informs the cost of funding the government and businesses, and of course as yields rise, the prices and value of current holdings in bonds falls.  In short, it is a vitally important and pervasive factor in the economy and markets, and it is showing tremendous volatility which is concerning.

Q2 2023 Earnings for the S&P 500 ended with a decline of -4.1% relative to Q2 2022. That completed three quarters of declining earnings and Q3 is expected to be a fourth sequential quarter of declining earnings.  While the level of earnings has declined year-over-year, the expectation remains for increasing earnings in Q4 2023, and given the recent price decline of the index, the Price/Earnings ratio has come back in line with historical norms (below the 5-year average and very near the 10-year average). 

We believe that the overall equity market (as represented by the S&P 500 index) is about fairly valued now, so we are primarily focused on finding opportunities in individual stocks, continuing to add to fixed income positions, and rolling existing bonds (reinvesting the proceeds)  as they mature.

It seems repetitive to mention it, but as campaign season (years?) ramps up here in the US, the war is ongoing in Ukraine, and friction continues with China, there remains the possibility of large market dislocations as a result of geo-political events.  Depending on the specifics and how things play out we are prepared with cash reserves to ride out the situation or do some bargain hunting.

We very much appreciate you and your business, please don’t hesitate to reach out if you have any questions or would like to discuss any of the above.  Rest assured that we are working hard on your behalf, so you can focus on your own work and life (or pumpkin-spice flavored items if you prefer).

Take care, Bo and Lesley