Market Insights Q3 2023

The stock market may soon be getting its “Gretzky” on, skating through the worst of the economic and monetary headwinds, and moving to where it perceives the puck (market) is going. Seasonal factors could favor the bulls as November approaches and investors ponder whether next year’s presidential election cycle could bestow good fortune on the stock market. In the meantime, this may be a good opportunity to evaluate holdings based on the relative strength trends playing in the market. Conventional wisdom may fall short as an effective investment approach. Even with ongoing uncertainties on numerous fronts, investors appear to remain committed to the growth themes. This is underscored, in part, by the unrelenting wide performance discrepancy between the Dow Jones Industrial Average and the Nasdaq Composite.

Furthermore, the most widely anticipated recession in history seems to keep getting pushed back as sticky inflation forces the Fed to hike and hold. The New York Fed probability of a recession in 12- months peaked at 70.9%, the highest since the early 80s, in May of this year. It has since tapered off to 56.16% in September as the Treasury yield curve remains deeply inverted and suggests a pending recession.

We believe investors need to focus on long-term investing and look beyond the headlines which include geopolitical concerns and consumer trends. The headlines may add volatility in fixed-income assets, but investment-grade bonds appear attractive for investors looking to earn higher yield potential without taking too much additional credit risk. The ICE BofA ML IG Index yield to worst at the end of September was 6.38%. This yield has been seldom seen since 2009. Except for the Great Financial Crisis, yields are sitting near 20-year highs. Investors have been reluctant to consider longer-term bonds, but the opportunity to selectively take advantage of these yields is here. When evaluating these opportunities remember to stay within your risk tolerance, expect volatility to remain elevated and we anticipate economic growth will continue to slow.

This environment presents both opportunities and risks for fixed-income investors. This is the time to understand where the risk lies in your fixed-income portfolio and hiring a professional management team with an experienced track record may help clients sleep at night during this stage of the cycle. Active managers will diversify portfolios across asset classes, sectors, and maturities and tactically adjust duration as needed.