The first half of 2023 was shaping up to be a record-setting year but reversed course in August and September as higher interest rates and fears of a rebound in inflation weighed on the markets. Global equity markets posted negative returns during the third quarter with small caps declining the most as the Russell 2000 Index was down -5.1%. However, on a year-to-date basis, the S&P 500 Index2 has increased over 13%, largely due to seven mega-cap companies (Amazon, Apple, Google, META, Microsoft, Nvidia and Tesla), commonly referred to as the “Magnificent Seven”. These stocks have increased 80% this year while the other 493 stocks in the S&P 500 Index have been relatively flat for the year. This narrowly traded market caused significant volatility during the quarter.
Only two of the eleven S&P 500 sectors finished the third quarter with a positive return, Communication Services and Energy. The worst performers during the quarter were Real Estate and Utilities, down -8.9% and -9.2%, respectively.
From an investment style perspective, there was a reversal from the first two quarters of the year as value relatively outperformed growth during the third quarter, but both investment styles finished the quarter in negative territory.
In foreign markets, all the major indices were negative with MSCI Europe Ex-US Index posting the worst return down -5.9% during the quarter; however, this same index has the strongest performance over the past 12 months with a return of 30.1% which is better than the S&P 500 Index at 21.6% over the same time period.
The 10-year Treasury yield has increased from 1.5% in December 2021 to 4.6% as of September 30, 2023. This significant rise in interest rates in a very short period of time has caused steep declines in all major fixed income sectors, with global bonds performing the worst, down 8.4% on a 3-year annualized basis. The only sector that squeezed out a small return during the third quarter was high yield bonds with a return of 0.50%; however, high yield bonds have returned over 10% during the past 12 months largely due to these bonds being highly correlated to the equity markets.
Gross Domestic Product, or GDP, was revised upward to a 2.1% annualized growth rate in the second quarter 2023, down slightly from a 2.2% growth rate in the first quarter, but maintaining close to the historical growth rate of 2%.
The unemployment rate surprised the markets in September with 336,000 jobs added, which was double the consensus estimate for the month. These new jobs held the unemployment rate steady at 3.8% and the number of workers joining the workforce has been growing. The pace of hiring has slowed which has helped dampen wage pressures; however, recent labor relations with auto workers and the entertainment industry may lead to slightly higher wage growth.
The headline Consumer Price Index (CPI) rose 0.6% for the month of August and was up 3.7% over the past year, primarily driven by higher energy prices as gasoline prices rose 10.6%, which was more than half of the CPI’s monthly gain. Core CPI, which excludes food and energy, moved slightly lower to 4.3%. The downward trend in inflation has started to broaden out with few categories seeing increases in prices and more seeing price declines.
