Market Commentary Q3 2023

Is this time different?

We are sometimes asked after a market downturn, “Is this time different?” While the answer historically has always been “No,” it certainly feels like a “Yes” this time, given the struggles in the stock and bond markets ever since the Federal Reserve started raising the federal funds rate in March 2022. Year-to-date through early October 2023, U.S. stocks (S&P 500) are up over 14% but are not back to their recent high. U.S. core bonds are down over 2% and have never had a third straight year of losses. Why is this? Figure 1 shows only one calendar year going back to 1977 when both U.S. stocks and bonds declined, and that was 2022. BFA clients are not alone in struggling to shake off that year, as every investor with stocks and bonds in their portfolios (the vast majority) is in the same situation.

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The good news is that brighter days should be ahead, which could benefit BFA clients. For example, Figure 2 shows our recommended Core Plus bond fund is set up to possibly earn over 13% if the federal funds rate drops by 1%. Most analysts and even the Federal Reserve are forecasting rate decreases this year.

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Finally, many investors are tempted to view Treasury bills, CDs, and money market mutual funds as bond replacements, given the higher yields they are currently paying. However, as rates come down, those short-term yields will decrease, and stocks, bonds, and a balanced portfolio should rebound over the next one- and five-year periods. (See Figure 3)

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Posted in Market Commentary