All data and commentary as of October 9, 2023.

As we enter the final stretch of 2023, financial markets have continued to leave investors conflicted. Economic data in recent months has been stronger than expected for the most part, but a more hawkish Fed tone has left markets bracing for a “higher for longer” rate environment amid mounting political and economic headwinds.

After 18 months of consistent and aggressive rate hikes, the Fed decided to leave rates unchanged at 5.25%-5.50% in their September meeting. While most analysts expect one more 0.25% rate hike before year end followed by an extended pause, the more aggressive tone that has been taken by Fed Chair Jerome Powell in recent statements has forced those who expected rate cuts early next year to temper their expectations. While we may not see rates begin to actually decrease until later next year, the FOMC is signaling to markets that their rate hike campaign is nearing its end. For investors, this means we may be at an opportune time to reposition the bond sleeve of portfolios to take advantage of the capital appreciation we will see across fixed income markets as rates peak and eventually begin to fall.

Political headwinds also dampened market returns in recent weeks, with the U.S. narrowly avoiding a government shutdown as Congress struggles to agree to a fiscal budget to support government spending. While government shutdowns can result in real issues for furloughed workers who are subject to their pay being suspended during these periods, previous shutdowns have shown us that the effect on the economy is typically negligible, and any stock market correction associated with government shutdowns is reversed quickly once the shutdown ends. While our national debt and deficit levels are an issue that will need to be addressed and reversed in the long term, short periods of government shutdowns typically have little impact on the investment portfolio of a well diversified, long term investor.

The economic and political headwinds mentioned above resulted in a disappointing quarter for investors across most markets return wise, with nearly every asset class slightly negative for the third quarter (with the exception of commodities and cash). After experiencing a period of explosive returns for the first half of the year, the Magnificent 7 (a group of large tech stocks like Apple, Tesla, Nvidia, and Meta) have started to show a loss of momentum over the past couple of months. Only 3 stocks in this group logged positive returns for the quarter (Alphabet, Meta, and Nvidia), while Tesla, Microsoft, Amazon, and Apple were all down for the period. While these stocks are more risky and volatile than a broad equity index, it is still worth paying attention to these trends – as these 7 stocks make up nearly 30% of the S&P 500’s total market cap and have a large role in determining the returns of the index as a whole.

As far as client portfolios are concerned, we are currently in the process of implementing some changes to our models to adjust to some of the economic shifts we see taking place. As eluded to previously, we believe now is an opportune time to reposition bonds for a peaking (and eventually falling) rate environment by extending duration within the fixed income sleeve of portfolios. We are also using this as an opportunity to add some new, more tax efficient and less expensive securities to taxable accounts to further reduce the impact on returns caused by tax drag and fund fees. Please don’t hesitate to reach out if you have any questions about your portfolio or these changes, and we look forward to seeing you soon!



Jake Fromm | Lead Investment Analyst, CFS® | It is our mission to help you think differently about your wealth so you can LIVE WELLthy™ today and tomorrow.

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