Q3 2023 Market Update

Markets were lower in the third quarter, as euphoria over AI related investments led to overbought conditions in some stocks, while higher long-term rates disrupted markets. We would characterize the declines as a typical intra-year correction, and we have a constructive view towards stocks for the remainder of the year. Markets have generally followed historical seasonal trends this year, which are moving out of the worst part of the year and into the best. While we have a positive tactical view towards stocks, our strategic view is more cautious, as we maintain what might best be described as an aggressively neutral stance. Our strategic macro view remains one of shifting global dynamics.

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We believe that we are in the midst of perhaps the largest geopolitical upheaval since WWII, which will certainly have impacts across financial markets. We are witnessing changing alliances, the end of old conflicts, and the beginning of new ones, as the old norms of US prominence and security guarantees morph into a new multipolar world. The recent horrific events in the Middle East are just the latest example of this. While conflict in the region is certainly not new, we cannot help but feel that recent talks of normalization between Israel and Saudi Arabia, along with security talks between the two nations and the US, played a part in the attack. Meanwhile, we have previously discussed the dynamics in Russia and China, as the former sees its global standing wane and the latter grows in influence, even as domestic issues threaten its long-term position. While this might sound worrying, we should not view the US position as one of weakness. We feel strongly that the US and North America are well positioned to weather this storm. As a result, we maintain a higher weighting to domestic equities than we have historically. Further highlighting our views, we are approaching one year since our decision to get out of emerging market funds, one that has paid off nicely, as the emerging market index is the worst performing of the major equity indices we track.

Here at home, we continue to move through what has been described as a rolling recession. Since the onset of Covid in early 2020, we have seen different segments of the economy perform well or poorly at different times. In essence, the entire economy was put in the spin cycle, and going on four years later we are still working to sort everything out. Recent weakness in manufacturing and frozen housing markets are being offset by continued strength in labor markets and consumer spending. Meanwhile, we are still in the early innings of a significant infrastructure and manufacturing buildout that will continue to support economic growth. Also, demographics and overall demand are likely to keep labor markets tight and wages trending higher. The inflation story is far from over, even as current trends point to slowing. We continue to expect volatility across this and many other economic indicators, and in markets as well.
 
Fixed-income markets continue to be turbulent, as the most recent developments have long-term rates moving to new highs not seen since before the financial crisis in 2008. Where possible, we continue to favor holding individual securities and maintaining a majority cash position. Gradually we will look for opportunities to increase bond allocations and move further out in maturity, but we are in no particular hurry to do so, and continue to emphasize safety. While the move in rates has been noteworthy, we are just getting back to what has historically been the normal range. In that context, we should view this as a positive, even as it creates waves in the short term.
 
After a long period of relative calm, we expect volatility to remain a theme for the foreseeable future, and we are positioned as such. In the grand scheme of things, we are experiencing a multi-year normalization, whether looking at geopolitics or financial markets. For all the noise, portfolios are positive this year, and as history has repeatedly shown, retreating to the sidelines is rarely a prudent strategy. It can be hard to make sense of the world and how things relate to investments, but that is precisely what we are here for. Thank you and please reach out with any questions or concerns.