October 2023 Market Update

The markets continued their decline for the month of September, logging their worst month since last December and the first back-to-back monthly declines in over a year.  Retail stocks, tech, utilities, REITS, and home improvement stocks (Lowes -10%) were all down significantly.  Even The Magnificent 7 that carried the first half of the year weren’t immune to September’s pullback; Nvidia lost -11%, Apple lost -9%, etc. (Meta / Facebook was the only 1 of the 7 to eke out a gain, +1.5%.)  The Equal Weight Index has officially crossed back into negative territory for the year.  That’s much more telling of the current state of the markets for us than simply looking at the S&P 500.

We thought we were overdue for a bit of a correction coming out of the great first half of the year and we’ve reminded clients that a -10% correction is normal even in the best of years.  The S&P is now off -9% from its recent highs.  Some of that can be attributed to seasonality as Aug / Sept are typically under-performing months for the markets with the 1^st week of Oct being the worst.  Here’s the YTD numbers:

 

Brokered CD Rates

 

While we expect stocks to have volatility, we often forget that bonds can also have wild swings, too, and that’s been the bigger surprise this past month.  The benchmark for interest rates is the 10 yr US Treasury bond; it was only a few months ago it was at 3.50%.  It recently spiked to 4.70% which is a massive move for bonds in a short amount of time and puts them at their highest rate since Aug 2007!  The higher the 10 yr Treasury climbs, the more pressure that puts on stocks and bond values drop.  (Ironically, this move higher has come as inflation has come down dramatically.)  The bond market is clearly trying to find its equilibrium.

If there’s one dominant theme weighing on sentiment right now, it’s this: rates higher for longer.  The Fed may not have hiked rates at their last meeting, but they did throw a bucket of cold water on the expectations they would cut rates by year-end or even early 2024.  We were never in the camp they were cutting rates in 2023 but it does appear the street is finally accepting the fact that higher rates are here to stay, at least for a while.   The US consumer is the biggest driver of the economy (70% of GDP in fact) and thus far has carried the economy when most were calling for a recession to have occurred by now.  We always felt like those calls were too loud and too early but, at some point, they will be justified.

Mortgage rates are nearing 8% while car loans are 10% and prices of both have skyrocketed post-pandemic. Credit cards are 20%, student loan repayments are starting back up, and the consumer will be running out of pandemic savings soon if they haven’t already.  Raymond James economists are calling for a mild recession 1^st quarter of 2024 and I think you can make an argument it may actually be a good thing at this point.  Recessions are a normal part of economic cycles and are a natural way for asset classes to “reset”.  That would also be the needed catalyst for the Fed to start cutting / normalizing rates.  What are “normal rates”?  I think it depends on who you ask and when, but it should not be artificially low, 0% Fed rates, nor should it be 8% mortgages.  Will the Fed cut rates before a recession starts and have the mythical no-landing / no recession?  History says probably not but at this point I think it’s ok to simply acknowledge that nobody knows the future…anything is possible.

That’s not to say there’s no reason to be optimistic.  For starters, the unemployment rate is still extremely low. The labor market has shown small signs of softening recently but it still remains very strong.  (Even the participation rate has improved).  While we all hate high borrowing rates for homes, cars, and credit cards, they are at least manageable if you have a job.  Don’t underestimate the strength of the American economy at full employment.

Inflation continues to decline faster than it went up and you can argue retail goods are actually in disinflation mode.  Gas and food remain stubbornly high, but I’m not convinced the Fed can do much to control commodity prices, which trade on a global scale.

Lastly, at this point, the markets are solidly in oversold territory and still down from their highs from January 2021.  That makes for excellent long-term opportunities to buy quality stocks at depressed prices for serious investors.   With cash and bonds both paying well over 5% now, a balanced portfolio is finally earning something while we wait for equities to rebound.   The final months of the year are historically some of the strongest.  Will that prove to be true again this year?  We’ll see soon enough.

 

---

 

In lieu of a Useless Fact of the Month, I’ve opted to share a favorite Quote of the Month.  This one comes from VP of Berkshire Hathaway, Charlie Munger.  Charlie has been Warren Buffet’s right-hand man since 1978 and a big part of Berkshire’s incredible track record.  He recently celebrated his 99^th birthday which makes this quote even better.  When asked to reflect on the current state of the markets, economy, and inflation, he thought a bit of perspective was in order:

“If I can be optimistic when I'm nearly dead, surely the rest of you can handle a little inflation.”

 

Any opinions are those of Sean Bokhoven and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not indicative of future results.

This is not a recommendation to purchase or sell the stocks of the companies mentioned.  There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. The Russell 2000 is an unmanaged index of small‐cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad‐based flagship benchmark that measures the investment grade, U.S. dollar‐denominated, fixed‐rate taxable bond market. An investment cannot be made in these indexes. The performance mentioned does not include fees and charges, which would reduce an investor’s returns. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance, and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Be sure to contact a qualified professional regarding your situation before making any investment or withdrawal decision.

Brokered Certificates of Deposit (CDs) purchased through a securities broker and held in a brokerage account are considered deposits with the issuing institution and are insured by the Federal Deposit Insurance Corporation (FDIC), an independent agency of the US, Government. FDIC deposits are insured up to $250,000 per issuer (including principal and interest) for deposits held in different ownership categories including single accounts, joint accounts, trust accounts; IRAs, and certain other retirement accounts. The deposit insurance coverage limits refer to the total of all deposits that an account holder has in the same ownership categories, at each FDIC-insured institution. For more information, please visit fdic.gov. About Liquidity: Funds may not be withdrawn until the maturity date Or redemption date, However, the brokered CD, are negotiable, which mean, that although not obligated to do so, Raymond James and other broker/dealers presently maintain an active secondary market at current interest rates, Market value will fluctuate and, if the CD is cashed out prior to maturity, the proceeds may be more or less than the original purchase price, Holding CDs until term assures the holder of par value redemption. CDs are redeemable at par upon death of beneficial holder. FDIC insurance does not protect against market losses due to selling CDs in the secondary market prior to maturity.

Bond prices and yields are subject to change based on market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. Holding bonds to term allows redemption at par value. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise.

Investing in the energy sector involves special risks, including the potential adverse effects of state and federal regulation, and may not be suitable for all investors. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Those markets are likely to be volatile, and there may be sharp price fluctuations even during periods when prices overall are rising. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility.