Renewed inflation concerns weighed on markets and drove Treasury yields higher in 3Q. Sticky inflation likely cements the Fed’s higher for longer rate policy and elevates risk of a hard landing, but we think the benefits to remaining invested outweigh the risks.
KEY POINTS
Remain invested, even as cracks emerge
- Oil prices jumped nearly 30% to a 12-month high in September ($90+/bbl) as OPEC extended production cuts despite strong demand.
- Equity market momentum paused as the S&P 500 fell over 3% amid concerns over higher rates and their impact on the economy.
- The Fed indicated its near the end of its rate hike cycle, but also made clear that even if activity weakens rates will stay high.
- Cracks in the economy are starting to form amid rising consumer (and business) borrowing costs. We continue to favor limiting credit risk in portfolios.
- Even with economic momentum softening we suggest investors remain fully invested with strategic risk taking.
Exhibit 1:
Key Markets Performance in 3Q23
Equity market momentum paused in 3Q as a re-escalation in inflation and sharp rise in interest rates caused investors to re-evaluate market prospects. Entering the final quarter of the year (which includes the S&P 500’s strongest period of positive seasonality) the S&P 500’s year to date return has already surpassed its average annual return. How the market finishes the year, and sets up for 2024, will be influenced by inflation, corporate earnings, and any weakness in the consumer.
Exhibit 2:
Major Market Performance 2023YTD
In our view inflation is the key “headline” focus of markets, but attention is really on Fed policy and the implications of a higher for longer rate environment. Specifically, the Fed’s intention to keep rates higher for longer, and if that will tip the economy into recession (ignoring the COVID-induced recession the economy has been in an expansion since 2010). So far the Fed has avoided causing a recession as it combats inflation, but economic momentum is starting to soften and the impact of higher borrowing costs are now being felt consumers (See Exhibit 3). It remains to be seen if consumer strength can be resilient in the face of these challenges.
Exhibit 3:
Consumer Borrowing Costs
The question is how do investors adjust portfolios amid fears of prolonged inflation and the potential for a recession. We continue to suggest investors remain fully invested and deploy money from the sidelines into their broader portfolios. While equity valuations are a concern, we think markets should be able to maintain current levels, especially if the rally broadens to other sectors outside of technology. At the same time, we continue to suggest a cautious stance in fixed income, favoring high yielding money market funds, floating rate debt, and strongly underwritten private credit vs. traditional bonds.
In our view, time in the market matters more than timing the market, and we see greater long-term potential for investor capital in markets vs. on the sidelines.
ENDNOTES
Disclosures
This commentary reflects the personal opinions, viewpoints and analyses of the author providing such comments, and should not be regarded as a description of advisory services provided by Defiant Capital Group or performance returns of any Defiant Capital Group client. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Defiant Capital Group manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary.
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisors.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Past performance is no guarantee of future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
A word on risk
All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. This report should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.