Q3 2023 Insights

Despite a promising start to the third quarter, the reality of higher-for-longer interest rates, given a slower-than-expected decline in inflation, soured investors’ outlook in September and October.  Furthermore, while reported earnings for the third quarter have been rather robust, and the U.S. economy delivered a knockout GDP figure for the quarter, markets have been looking beyond to the macroeconomic headwinds on the horizon.

Compounding this uncertainty is a fresh conflict in the Middle East after the abominable terrorist attacks committed by Hamas and the mounting military response by Israel.  While a traditional “flight to safety” in markets has not occurred and commodity prices (oil in particular) have receded back to pre-October 7th levels, this new conflict is unquestionably of a different magnitude, and the risk that other regional and global powers could be drawn in remains very real.

For investors in this volatile and uncertain environment, discipline is essential.  These are times when our emotions tend to get the better of us, but it is critical to try to separate them from our portfolios.  On the one hand, short-term outperformance of a few large, index-dominating stocks can trigger a human’s inherent sense of greed and “FOMO.”¹ It is important not to get swept up in a crowded momentum trade, as the tide can go out just as quickly as it comes in.  Only perfect market timers can profit off those scenarios; and in all our years, we have not found any that can consistently time the tops and bottoms of each and every cycle over each and every hour, day, week, and month.

At the same time, terrorist attacks, war, and heightened geopolitical risk feed on our personal fears and anxieties.  It is just as important to hold tight, remembering what your portfolio’s goals are and how it is positioned.  Diversification across numerous sectors and markets protects against an existential crisis in any one company or country.  Maintaining broadly diversified exposure to equities is still one of the easiest and least-expensive ways to make sure one’s wealth is growing above and beyond the rate of inflation.  Furthermore, if all near-term liquidity needs have already been set aside in short-term, high-quality bond and/or money market funds, then there would be no need to sell out of longer-term investments at an inopportune time.

While the circumstances surrounding each episode of market volatility are always different, we have been through many cycles in the past.  We know these are not the moments to make any big changes to long-term strategies, but we can still tinker under the surface.  Through every crisis, there are always benefits to staying invested and opportunities to make portfolios more efficient as we wait to emerge on the other side.

Q3 Financial Markets Performance


U.S. stocks advanced through the early part of the third quarter, as prospects for a “soft landing” of the economy increased.  However, a strong labor market, along with resilient consumer spending, forced the Federal Reserve to remain hawkish and raise rates once more at the end of July.  Interest rate-sensitive sectors such as technology, consumer staples, and real estate led broad market indices lower in late September erasing earlier gains (see Exhibit 1).  Supply cuts by OPEC helped energy stocks gain ground.  Large-cap stocks declined less than mid and small caps, while growth generally outpaced value.

Stocks in non-U.S. developed markets also moved lower, as major central banks indicated policy rates would remain elevated despite evidence of economic slowdown.  Additionally, the U.S. dollar strengthened against most currencies during the period, further restraining returns for U.S. dollar-based investors.  European stocks² were also negatively affected by the ongoing weakness of China’s economy – a major market for European exports – and by higher government bond yields.  Japanese stocks ended the period slightly negative (though positive in local currency), as the historically weak yen benefited local exporters.

Performance of emerging markets stocks was negative, albeit ahead of developed world equities.  Chinese stocks lost ground on continued economic stagnation and resurfacing of problems in the property sector.  Shares in Taiwan and South Korea also declined as economic prospects for their largest trading partners (the U.S. and China) dimmed.  Meanwhile, shares in India and Malaysia advanced as internal economic indicators improved.

¹ “Fear of Missing Out”

² As measured by the STOXX Europe 600 Index





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