2023 3rd Quarter Overview

Jeffrey L. Stock, Jr., CFA, MBA, 2023-10-15

Major indexes were negative on the quarter halting the strong momentum coming in to the half year mark.  Looking at ETFs that track major indexes, the Nasdaq 100 (represented by QQQ) has been the clear outperformer this year followed by the S&P 500 (SPY).  The Dow Jones (DIA) and Small Cap stocks (IJR) have not performed as well.  The major equity indexes were negative in Q3 from August and September returns (see YTD Equity Index Overview: Based on ETFs- below). 

A quick look at sectors explains why the Nasdaq has been such the big winner.  Communications, Technology and Consumer Discretionary have been the big winners while the worst performers have been Real Estate, Consumer Staples and Utilities.  All sectors were negative in the 3rd quarter except for Communications and Energy- which benefited from the price of oil zooming higher (1).  Taking a closer look at things, most of the gain in the major indexes has come from PE Expansion YTD rather than EPS growth.  The S&P 500 Trailing 12 month Earnings has actually gone down year to date, but the 12 month forward earnings estimates have increased over the same period- leaving the markets very dependent on forward expectations as things get dicey on a global scale (see “YTD Changes: S&P 500 Trailing 12 Month and Estimated Forward 12 Month Metrics” below).

 

Treasury markets have been rather volatile.  The benchmark 10 year yield finished the quarter at the highest level since 2007 (2).  Inflation has been coming in hotter than expected (3) causing more hawkish speak from the Federal Reserve officials.  Overall the yield curve has shifted up YTD and in the quarter as the market digests the "Higher for Longer" narrative from the Federal Reserve and what that means for markets (See “2023 YTD Treasury Rate Changes” to the right).

 

So much of what the Federal Reserve Board of Governors (FRB) plans to do is based on inflation.  Inflation has remained above the FRB's target level of 2% (4) and picked back up in July and August- rising both months. Rising oil prices (5) have certainly factored in rippling through the economy.  The labor market has also been very tight (6).  Unemployment remains low and wages have been increasing (although decelerating) at a faster pace than the FRB would like to see. All of this is in keeping with the FRB message of "Higher for Longer" regarding short term rates.

 

We certainly enter the 4th quarter with uncertainty abounding.  The war in Ukraine is not showing signs of letting up.  Now there is a war in Israel.  Oil initially spiked on the news but it remains to be seen if supply will actually be impacted.  Volatility Forecasts for the market are higher than the Q2 end, but low overall (7).  There is talk of a recession.  We are starting to see signs that consumers are stretched from companies like AT&T (8).  We are also seeing that bank lending is slowing (9).  The FRB still sees a possible "soft landing" for the economy.  We are looking for opportunities in traditionally defensive names and taking advantage of higher short term treasury rates than we’ve had in years.  We expect elevated volatility over the quarter ahead in both fixed income and equity markets.

Notes

  1. All sector data is based on the State Street SPDR Select Sector ETFs for each sector and sourced from Yahoo Finance (the total return data) as of 10/1/2023. The symbols used are XLB, XLC, XLE, XLF, XLI, XLK, XLP, XLRE, XLU, XLV, XLY.

  2. All current and historic treasury yield data is sourced from the St. Louis Federal Reserve FRED system. The symbols and Term Yields are as follows for the Constant Maturities listed: DTB3 (3 Month), DTB6 (6 Month), DGS1 (1 Year), DGS2 (2 Year), DGS10 (10 Year), DGS20 (20 Year), DGS30 (30 Year)

  3. Inflation Data is sourced from the St. Louis Federal Reserve FRED system under Consumer Price Index: All Urban Consumers (BLS) [CPIAUCNS] and Personal Consumption Expenditures: Chain-Type Price Index (BLS) [PCEPI]

  4. Federal Reserve Inflation target is 2%. Further explanation can be found here on the Federal Reserve website.

  5. Oil Prices are sourced from yahoo finance, using the next month futures contract under the symbol CL=F.

  6. Employment data has been sourced from St. Louis Federal Reserve FRED system using Average Hourly Earnings of All Private Employees (CES0500000003) and the Unemployment rate (UNRATE).

  7. Volatility Forecast is the VIX rate retrieved from Yahoo Finance under the symbol ^VIX. This measures the forward 30 day implied volatility from S&P 500 index options (see here for a deeper explanation of VIX).

  8. AT&T warned that customers are slower to pay their monthly bills. “AT&T Warns That Customers Are Slower to Pay Monthly Bills” by Drew Fitzgerald, 2023.7.21 (click here).

  9. St. Louis Federal Reserve FRED system, Total Bank Credit, All Commercial Banks (TOTBKCR) as of 2023.10.01

This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

 All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed.  All economic and performance data is historical and not indicative of future results.  All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.

 Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  Indexes are unmanaged and do not incur management fees, costs, or expenses.  It is not possible to invest directly in an index.