Q3 Market Review and Outlook
Markets In a Minute: Q3 Market Review and Outlook
After a surprisingly strong start to the year for the S&P 500, the third quarter saw disappointing returns for a variety of asset classes. Stocks and bonds suffered losses, while commodities were a rare bright spot. And of course, since the close of the quarter, a devastating conflict has broken out in the Middle East. Despite the less-than-stellar recent market performance, we are optimistic about forward returns.
Asset Class Returns, Q3 2023 (%)
Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and not subject to fees. It is not possible to invest directly in an index. Note: views are from a U.S. dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. Source: Kestra Investment Management with data from FactSet. Index proxies: Bloomberg U.S. AGG Bond Index, ICE BofA U.S. Corporate, ICE BofA U.S. High Yield, S&P 500, MSCI EM, MSCI World ex US Index, Dow Jones U.S. Select REIT, and Bloomberg Commodity Index. Data as of September 30, 2023.
Unlike the first half of the year, when bigger, more-growth-oriented stocks outperformed other shares by a wide margin, in the third quarter large-cap and small-cap stocks, growth and value stocks retreated about 3%. The exception were small-cap growth stocks, which fell by a much greater 7%.
Sector performance was quite differentiated and leaders shifted from earlier in the year. Technology stocks, for instance, had been clear standouts in the first half, but dropped by about 6% in the third quarter. The Energy sector, by contrast, rose 12%, helped by rising oil prices.
US Equity Sector Returns, Q3 2023 (%)
Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and not subject to fees. It is not possible to invest directly in an index. Note: views are from a U.S. dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. Source: S&P and FactSet. Index proxies: S&P 500 Index sectors. Data as of September 30, 2023.
The Federal Reserve appeared to inch closer to the end of its rate hiking cycle, even as some inflationary pressures remained. In July, the Board of Governors raised the fed funds rate for the eleventh time since early 2022, then held the rate steady at its next meeting. As economic growth appeared to reaccelerate, longer-term interest rates followed the Fed’s lead and Treasury yields across the maturity spectrum rose.
While economic growth has remained remarkably resilient, and in some cases has even grown stronger, higher interest rates are beginning to pinch in some areas. More consumers with credit card debt are falling behind on their payments, and more companies are declaring bankruptcy relative to the last few years. While these levels are not alarming compared to previous cycles, they do bear watching, particularly if the Fed expects to hold rates at these higher levels.
Last quarter we discussed how uniquely concentrated the equity market had become. The seven largest names in the S&P 500 – sometimes called the Big 7, or Magnificent 7 – were responsible for essentially all of the positive performance of the index in the first half of the year. While the remaining 496 names in the index were more or less flat. Given that enormous divergence, we had expected that the market’s leadership would change and that’s indeed what we experienced last quarter. Going forward, we continue to look for opportunities in the areas of the market that may have lagged.
Stock Market Run Fueled by Technology Innovations
NOTE: Values are indexed to 100. Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and not subject to fees. It is not possible to invest directly in an index. Note: views are from a U.S. dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. Source: Kestra Investment Management with data from FactSet. Index proxies: S&P 500, Russell 2000, and The Big 7 (Apple, Amazon, Alphabet, Microsoft, Meta, Nvidia and Tesla). Data as of September 30, 2023.
Though economic growth will likely be challenged as high-interest rates filter through the economy, consumer and corporate balance sheets remain healthy. Bonds offer attractive yields and a likely near-term end to interest-rate hikes. Corporate earnings look poised to resume a healthy growth rate.
While markets may move up and down in the near-term, a properly diversified portfolio, one that is aligned with your goals and objectives, remains the best way to grow wealth over time.
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Investment Services, LLC, Bluespring Wealth Partners, LLC, and Grove Point Financial, LLC. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by any entity for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. Kestra Advisor Services Holdings C, Inc., d/b/a Kestra Holdings, and its subsidiaries, including, but not limited to, Kestra Advisory Services, LLC, Kestra Investment Services, LLC, Bluespring Wealth Partners, LLC, and Grove Point Financial, LLC. Does not offer tax or legal advice.