Heading into the final months of the year we have seen bullishness fade as the market is currently in the midst of its fourth selloff of 2023. Optimism that the Federal Reserve (Fed) will start to loosen monetary policy has turned, generally speaking, to higher interest rates for much longer than was initially expected. In fact, we are anticipating at least one more rate hike prior to year-end.
Had you asked us just six to eight weeks ago if recession was looming our response would have been that the Fed might actually pull off its soft-landing scenario. Meaning aggressively higher rates to tame inflation without the domestic economy dipping into recession. Our tune has certainly changed over that time and our feeling now is that recession is more likely at some point early-mid 2024 as higher rates continue to filter through the economy. As stated in last quarter’s newsletter, we remain true to our assessment recession is likely mild. In part due to a stubbornly resilient labor market. Whether post covid related, the great resignation or simple worker shortages, wages remain high and unemployment historically low.
We have discussed concentration of returns in the S&P 500 index in our Weekly Market updates over the course of the year. The ‘magnificent seven‘, which now equate to over 90% of the index’ gains year-to-date, are showing signs of weakness. The 10-Year US Treasury just surpassed 5% for the first time since 2007, the combination of which leads to less risk appetite for equities. And an above average allocation to cash and cash equivalents in our models.
As you know our models are built on identifying trends in the marketplace which dictates how much risk we take on at any given time. Needless to say, in what we would equate to a trendless market, the models have struggled to gain traction over the course of the year. Amplified in Q3 which saw a measurable pullback of more than 3%. Leaving us more in line with the fractional returns of the non-cap weighted Dow Jones Industrial Average than the cap-weighted S&P 500 index year-to-date which favors the seven stocks mentioned above.
Over the course of the year, whether in the Exchange Traded Funds (ETFs) within the Tactical Allocation Portfolio (TAP) or individual equities within the Sector Equities (SEC EQ) model we have in fact owned all of the ‘magnificent seven’ over the course of the year. Albeit not in the same proportions as the S&P 500, nor beginning in late January as we were remained in risk-management mode following an ugly 2022 which saw the S&P 500 drop over 18%. The models have identified trends only to be thwarted by one or more of the four selloffs. The rearview mirror shows similar trendless periods dating to late-2011, late-2015 into early-2016 and the present. These market conditions are rare, and challenging, but we will get through it. We always do. Longer term markets will normalize and we are hopeful back to business as usual.
We have heard from many of you, and encourage you to keep the calls and emails coming. A challenging environment is always a good time to take stock, to look at your longer-term plan and to see what effect if any current conditions have on your future. Our guess is little to none. We appreciate the continued confidence and have faith the future is bright.
We look forward to hearing from you soon.
