An increase in bond yields over the final weeks of the third quarter interrupted the stock market rally, reversing the positive trend year to date. Utilities and consumer staples ordinarily considered more defensive sectors were disproportionally affected, while real-estate related stocks also took a hit.
When intermediate and long-term bond yields jump higher, dividend payments on the above sectors appear less enticing. Investors who are willing to bear the risk of receiving the less appealing dividend payments then require lower purchase prices to compensate for the greater perceived risk.
Investors are heading into the final quarter of 2023 worried the Fed will keep short-term interest rates higher for longer than expected. This is mostly due to the economic data coming in better than expected relative to what had been priced into markets during the Spring and Summer months.
Going forward, I believe the lagged effect of tighter monetary policy will likely become more apparent. This translates into slower growth, a weaker labor market, and lower inflation. In turn, bond yields should first begin to stabilize and then ultimately decline.
The bond bear market over the past couple of years has been relentless. With short-term interest rates moving from effectively 0% to 5+% in a relatively short time period, it is difficult to ignore the likelihood something within the market ecosystem doesn’t break.
With that said, I continue to expect large capitalization technology companies to outperform most other industries as their products, size, and power justify a premium and prove difficult to beat. Money market yields also continue to be an attractive option, providing yields greater than 5% on an annualized basis, which should not be taken for granted.
How The Markets Did Last Quarter?
It was a difficult quarter for investors as bond yields surged and stocks corrected lower. Few market sectors put up positive performance. Broadly speaking, money markets and energy related equities were the highlights.
For the quarter, the S&P 500 was down -3.65%, Russell 2000 Small Cap Index was down -5.5%, Developed International (EAFE) was down -4.9%, and Emerging Markets were down -2.2%.
Fixed income was even more challenging with intermediate U.S. Treasuries down -5.2% and long-term U.S. Treasuries down -13.8%.
During periods of market declines, it is common for investors to have an emotional reaction and in the most extreme circumstances run for the hills. We are experiencing the part of the investment roller-coaster that tests the stomachs of investors and tempts people to jump off at the wrong time. I am here to say this is not and never has been a winning investment strategy.
More to the point - I recently viewed a post on X (Twitter) which quoted a passage from the famous investor Peter Lynch’s book, “One Up on Wall Street.”
“If you put $100,000 in stocks on July 1, 1994, and stayed fully invested for five years, your $100,000 grew into $341,722. But if you were out of stocks for just thirty days over that stretch – the thirty days when stocks had their biggest gains – your $100,000 turned into a disappointing $153,792. By staying in the market, you more than doubled your reward.”
A key reason to adopt a buy-and-hold approach is that the market moves in fits and starts – not in a straight line. A year’s worth of gains can be made in just a few days. When it comes to putting money to work in the market, it is time in the market, not timing the market.
Enclosed are your investment reports and advisory invoice for the last quarter. Please feel free to contact us if you would like to discuss our investment strategy for the upcoming quarter. Thank you for your continued trust and confidence.
Justin Kobe, CFA
Founder, Portfolio Manager & Adviser
Pacificus Capital Management
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The Wall Street Journal: https://www.wsj.com/market-data?mod=nav_top_subsection
International indices: https://www.msci.com/real-time-index-data-search
Treasury market rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/
Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Cambridge and Pacificus Capital Management are not affiliated.
Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as investment, tax, or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. These are the opinions of Justin Kobe and not necessarily those of Cambridge Investment Research, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.
Investing in the bond market is subject to risks, including market, interest rate, issuer credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies is impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Diversification and asset allocation strategies do not assure profit or protect against loss.