Weekly Market Perspectives: Q3 Review
Published: October 2, 2023
The quarter ended with a whimper as the S&P 500 traded lower by -0.7% last week to close September down -4.8%. September was the worst month for stocks in 2023, while fixed income suffered its worst month since February. Bonds, as measured by the Bloomberg US Aggregate index, traded lower by -1.0% last week to finish September down -2.5%. The S&P 500 traded lower by -3.3% in Q3 but remains higher by +13.1% year-to-date whereas the US Aggregate index was down -3.2% in Q3 and is now negative for 2023, down -1.2%. The theme of the quarter was rising rates on the long end of the curve – the 10-year Treasury increased from 3.8% to 4.6% in Q3, a large quarterly move. As such, any factors/sectors sensitive to medium- and long-term rates such as small caps, high growth, real estate, and utilities underperformed in the quarter.
The economic outlook has taken several hits in September even with more optimistic economic projections from the Federal Reserve. First, the labor market has been showing signs of stress. Job openings fell, the unemployment rate increased, and real earnings moderated. Initially, this was welcomed by the markets as hope grew that the Fed would be more dovish in their rhetoric around rates. Next, inflation proved to be stickier than expectations, and consumers started to feel the pinch from higher food and energy costs. The rise in oil has been a key contributor to higher inflation through Q3 – oil closed September at $91 a barrel, up from $71 in June. For the first time since March, real retail sales dipped into negative territory showing the effects of higher prices on the consumer. Additionally, the consumer is coming under additional pressure. Pandemic era savings have been spent and consumer debt has been steadily climbing amid higher interest rates. The confluence of data meant the Fed remained in a hawkish position at their September meeting indicating rates would need to stay ‘higher for longer’ – three words the market does not like. Finally, consumer sentiment has persistently come in lower than expectations as labor strikes, higher food and gas prices, a lack of home affordability, and more rhetoric around another government shutdown weighs on the psyche.
The Federal Reserve’s restrictive monetary policy is tightening financial conditions at a rapid pace. Higher interest rates, a surging dollar, and lower stock prices are squeezing financing sources. Taken together with moderating growth expectations, high valuations, sticky inflation, and a slowing labor market, investors are resetting their risk appetite which likely signals more headwinds.
Another worrying trend is the convergence of stock and bond performance in 2023 reducing diversification benefits. A three-month measure of correlations between the S&P 500 and benchmark Treasuries has climbed to the highest level since February – the fraught relationship between these asset classes continues. Additionally, leadership in the S&P remains very narrow. Apple (AAPL), Amazon.com (AMZN), Google-parent Alphabet (GOOGL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA) and Tesla (TSLA), otherwise known as the “Magnificent Seven,” continue to dominate the index year-to-date. This group of companies has contributed nearly 85% of S&P 500 returns in 2023. The remaining 493 companies in the S&P 500 index are effectively trading flat for the year, offsetting the gains in growth sectors.