Global stock indices peaked in the back-half of July after having reached technical resistance just below their spring 2022 levels. The balance of the third-quarter saw modest corrections after the extended recovery that began last October led by the “Magnificent Seven” artificial intelligence darlings stalled out. Although inflation continues to moderate, with select components looking sticky, the jobs market proving resilient, the Fed having raised rates in July and signaling another possible hike ahead, markets finally came around to believing in the Federal Reserve’s “higher rates for longer” mantra.

This raises of the odds of a future recession despite the Fed’s hope for a “soft landing“, and at the very least could provide longer lasting headwinds than previously anticipated. That said, markets have been worried about a pending recession that has yet to materialize for going on two years now! Nevertheless, this change in thinking dramatically affected bond yields, which rose rapidly last quarter, stressing stocks in the process. Exacerbating the weakness were auto and entertainment industry strikes, another government funding showdown, and the subsequent dethroning of former House Speaker McCarthy. Consequently, the S&P 500 Index fell over -8% (‘SPY’ Proxy ETF) from its peak, although it finished down just -3.2% by quarter-end.

With the notable exception of commodities, up +10% for the quarter (‘PDBC’), and alternatives (‘QAI’), our remaining tracked asset classes all fell modestly. The rate-sensitive real estate sector was particularly hard hit, falling -6.1% (‘RWO’). Perhaps most difficult for traditional “balanced portfolios,” bonds also fell back into negative territory for the year, featuring the Bloomberg Aggregate Bond Index down -3.2% (‘AGG’). This could make for a historic third-consecutive year of bond losses. The flip side here, is that yields have been “de-inverting,” with longer-dated issuances now looking their most attractive since the Great Recession nearly 16 years ago.

Hearkening back, government funding was only given a proverbial can kick, and still must be addressed by mid-November. And, while markets have held up relatively well thus far, geo-political risks have increased significantly with the tragic events now occurring in the Middle East. However, many investors may be surprised to learn markets often do quite well during times of conflict after an initial shock (LPL, tinyurl.com/geopolevent). With so many risks already known to markets and earnings off to a strong start, as much as we are wary, we cannot dismiss the possibility of a positive seasonal bounce into year-end. For now, we will continue to adapt to changing conditions with our combination of strategic and tactical investing approaches.

Source: Index proxies based on dividend adjusted ETF time-series data from CSI Data, Inc. Data considered dependable, but not guaranteed. Past performance is no guarantee of future performance or profitability. Statements herein do not constitute individual investment advice – please speak with your advisor about your particular situation.