Third Quarter 2023 Review and Outlook
Written by Tim Rigby
The third quarter continued the very mixed year we are having. According to The Wall Street Journal, the indexes posted returns as follows:
Quarter YearThe Dow Jones Average -2.62% 1.10%
The S&P 500 -3.65% 11.70%
The NASDAQ Composite -4.12% 26.30%
While the indexes declined during the quarter, the economy is holding up surprisingly well in the face of much higher interest rates. Higher long-term rates hurt housing, companies with excessive debt, and many others including the Federal Government. It is estimated the Treasury must sell several trillion dollars of new debt to finance all of the spending Congress has approved! Despite this, inflation has been moderating so the Federal Reserve could be finished raising short-term rates. Given these issues, long-term rates could go a little higher while short rates could begin to fall. The result could be a more normal “yield curve” for the first time in a decade.
The economy is generally doing well with the consumer still spending. Travel is still exceptionally strong, which is very good for airlines, hotels, and all the related industries. Housing sales have slowed as many people with mortgages from the last 5 or 10 years have very attractive interest rates around 3%. New mortgages are almost 8% so the difference is startling which will slow housing even more over time. Demand remains strong, however, so it is unlikely to see a large decrease in pricing.
Big technology companies led the stock rally early in the year while most other sectors were flat or down in price. The tech stocks were very expensively priced and have declined modestly in some cases. The other sectors seem very reasonable or underpriced. Our thinking is money will move out of the highly-priced tech stocks and into the other sectors once the market is convinced the Federal Reserve has concluded its interest rates tightening cycle. That should be soon as the Fed has mentioned they will do perhaps one more hike at most and the market typically looks out 6 to 12 months in anticipation.
When rates start to fall, it is typically a strong period for both stocks and bonds. Many sectors of the stock market are very reasonably priced, and many companies are paying great dividends. The rally should be broad which will benefit most diversified portfolios. On the bond side, interest rates are attractive for the first time in years, so we will look to lock in these higher rates in shorter-term bonds or CDs when we believe they have peaked.
Enjoy this beautiful fall weather and let us know how we can help.
Tim Rigby