During the third quarter all eyes remained on interest rate policy once again. While at the same time markets were pricing in that rate hikes were nearing an end, the Federal Reserve’s posture in the form of projections, guidance and actions sent warning signals that additional increases in rates were likely. Currently sitting at 5.50%, the Fed Funds Rate was increased one time this quarter for the tenth consecutive raise and a total of 100 basis point increase in 2023. While YOY inflation has broadly slowed, there’s still significant sticker shock, as price increases continually cut into household budgets; up over 18% since the current administration assumed the White House in January 2021. Embedded in the most recent CPI report, Real Estate has been specifically hit hard in relation to affordability and slower activity. Shelter and rent prices traditionally exhibit much slower deceleration and could take over a year to begin to come down from recent highs. Areas not included in the reported CPI figures that tend to affect consumers financially include: education costs, elder care costs, rural spending and increases to income tax. In positive news for the markets, consumers spent down excess savings that were built up after the covid pandemic and resulted in increased retail sales, surpassing expectations and driving GDP estimates higher. In addition, there were indications of normalization, as employment levels moved toward pre-pandemic levels.

Signs of the “new bull market” last quarter that was fueled by AI over-exuberance came to an abrupt halt by the end of Q3, as stock and bond correlations were once again in lock step heading lower. The major stock indices posted losses of -3.3% and -2.1% for the S&P 500 and the DJ Industrial Average, while the NASDAQ Composite Index retreated -2.9% in Q3. Internationally, the EAFE fell -4.1% for the quarter. The bond markets also dropped, as the Bloomberg U.S Aggregate Bond index fell -3.2%. Gold ended the quarter down slightly, losing -3.7%. Crude oil reversed course from Q2 gaining 28.5% for the quarter and up 14.4% YTD. The average stock in Morningstar’s coverage universe is now undervalued by 9%. Sector specific valuations showed Communication Services continued to be the largest undervalued sector, trading 23% below fair value. Real Estate was next at 22% undervalued, followed by Utilities, Basic Materials and Financial Services all at 15% under fair market value. All remaining sectors were trading slightly below fair market value1. With short-term rates remaining high and the yield curve now inverted for over a year, equity markets are not sufficiently compensating investors for the economic risks currently present, as well as the risk of recession looming. The scenario for robust economic growth is hard to accept with current Fed hawkishness, “higher for longer” interest rates (15 year high) and increasing economic headwinds. The current high market P/E ratio of 24.5 is 52.7% over the historic average of 16.0 giving further pause to just jumping into the market with new money. We continue to remain content earning the high relative money market rate of approx. 5.25%, while waiting for a better opportunity to more broadly enter the equity markets.

We continually adjust our outlook based upon new info and market risks facing our clients’ financial success. We look forward to navigating the market for our new clients and continually earning your business, your referrals and you’re your respect.

Jack A. Kennedy
Chief Investment Officer