BY: RYAN P. JOHNSON, CFA, CFP® - MANAGING DIRECTOR OF INVESTMENTS
The third quarter saw year-to-date highs in stock prices in late July but also multi-year highs in interest rates towards the end of the quarter. Higher rates were the primary driver of lower stock prices to finish the quarter, with many stock markets posting a quarterly loss for the first time since Q3 of 2022. Bond returns continue to be muted by higher rates because bond prices fall as interest rates rise. Other than oil, many commodity prices fell, like gold, lumber, & corn.
The top 10 stocks in the S&P 500 (top 2% by quantity) account for over 30% of the weight in the index. This year has been unusual, with 7 of those largest stocks driving nearly all the positive return for the index. Apple, Microsoft, Alphabet, Tesla, Meta, Amazon, and NVIDIA have large gains, which helped drive the S&P 500 to a gain of 13.1% year to date (YTD). This compares to the median S&P 500 stock gain of just 0.7% YTD. Apple and Microsoft recently had weights of 7% and 6.5% in the index, respectively, while our clients typically do not have more than 5% of their stock allocation in any one stock for risk management purposes. Not owning a select few stocks, such as NVIDIA, could really impact this year’s account performance. All things considered, we do not expect a repeat of this concentrated performance. Interest rate sensitive sectors like Real Estate and Utilities posted the largest losses this quarter, along with the traditionally defensive Consumer Staples sector. The Technology sector, along with what we would call “Tech-adjacent” stocks in the Communications Services and Consumer Discretionary sectors, continued to post relatively better returns.
Interest rates moved higher despite moderating inflation readings. The Fed may have raised rates for the final time in this cycle on July 26th, which put the effective Fed Funds rate at 5.33%. The Fed continues to leave the door open for future hikes and is continuing its talk of higher rates for longer to contain inflation. Right now, the market does not seem to expect additional hikes, but it is buying the narrative of higher rates for longer, as 5-year, 10-year, and 30-year Treasury yields rose each of the past three months. Current yields seem attractive: from 4.5% in Treasuries to 5% in money market funds to over 5.5% in short-term investment-grade corporate bonds. We have been adding to Treasuries broadly in client portfolios for the first time in over a decade.
Jobs remain strong and we are keeping a close eye on consumer spending in the historically strong fourth quarter. Higher oil prices, resumption of student loan payments, and still high prices for homes and autos are potential headwinds. Still, corporate earnings in the fourth quarter are expected to grow 8% compared to the fourth quarter a year ago. This could be the first quarter of year-over-year earnings growth in 2023, and it could be just enough to make aggregate earnings growth positive for the calendar year.
From our team to you, we thank you for your continued trust and support.
Ryan P. Johnson, CFA, CFP®
Managing Director of Investments
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.