Third Quarter 2023 Market Perspective

The Bureau of Labor Statistics (BLS) reported that 187,000 people found new jobs in August but the unemployment rate still rose to 3.8%—its highest level in 18 months. The rise in this case was mostly positive as BLS indicated that the increase was primarily due to more people rejoining the job market to look for a job. The BLS also reported that year-over-year wage growth eased slightly in August to 4.3%.

Whatever impact easing wage growth may have had on inflation was offset in large part by a 28% increase in oil prices in the third quarter. The rise in oil prices helped push the Consumer Price Index (CPI) up 0.6% in August to 3.7%. The silver lining to the August report was that the Core CPI Index, which excludes energy and food, continues to trend downward.

The continuing downward trend in the Core CPI was likely a factor in the Federal Reserve’s (the Fed) decision to take a pause from raising its Federal Funds interest rate when it met in September. The Fed did raise the rate 0.25% in July to a range of 5.25% to 5.5%—a 22-year high. Most market participants had expected the September pause, but many were surprised by the Fed’s meeting notes that showed many Fed decisionmakers thought an additional rate hike in 2023 was possible and that they didn’t expect to lower interest rates significantly in 2024.

The bond market’s realization that interest rates could stay near their current level for an extended period, caused a demand for higher yields on longer-term bonds. The calculus of bonds though, requires bond prices to drop so yields can rise. As a result, the Morningstar Core Bond Index fell 3.18% in the third quarter and is down 1.18% for the year. The segment of the Core Bond Index in bond maturities greater than ten years fell 9.53% in the quarter. The segment of the index in bond maturities shorter than five years (and where Boulay has allocated most of client bond holdings) was up 0.22%.

Higher yields make bonds more competitive with stocks, which led to some adjustment in the stock market in the third quarter as well. The Morningstar US Market Index was down 3.19% in the third quarter but remains up 12.81% for the year. Growth stocks gave back 5.92% in the quarter but remain up 20.56% for 2023 per the Morningstar US Growth Index. The Morningstar US Value Index fell 1.91% in the quarter and is up 2.06% for the year. Small cap stocks fell 4.56% in the third quarter but remain up 5.71% for the year per the Morningstar US Small Cap Index. International stocks were not immune as the Morningstar Global Markets – ex US Index also fell 3.19% in the quarter. The index remains up 5.83% for 2023.

After the past 18 months, there should be no doubt that interest rates play a big role in determining investment performance. Very low interest rates for over 12 years heavily favored investing in stocks over bonds. With interest rates now approaching long-term levels, both the bond and stock markets are having to adjust to the new (old) reality. Bond investors can breathe a sigh of relief that their bond portfolios are providing decent income again. Stock investors would be wise to expect returns going forward that are more in line with long-term averages rather than the stellar 16.5% annual return that the S&P 500 Index turned in between 2013 and 2021.

As noted, Boulay’s portfolio team has done its best to take advantage of the quick rise in short-term interest rates over the past 18 months as the Fed increased interest rates. The team has also looked to add exposure to the oil industry in portfolios where appropriate. The team has near-daily discussions on the markets and will continue to work to position client portfolios to better deal with the ever-changing market conditions.

After a 3.5-year pause, student loans repayments have restarted. During the pause, some student loan repayment options were updated. If student loans are a big expense in the budget of someone in your family, it is worth reviewing how the changes to the student loan program may impact them. Let us know how we can help. Also, as we start on the closing chapter of 2023, our attention turns to planning for taxes. If you are wondering about your tax situation, please contact a Boulay Financial Advisor to arrange a tax planning meeting.