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Q3 Review

After bouncing from last fall’s lows for three consecutive quarters, the most recent quarter saw both stocks and bonds fall in price. There was no single catalyst to blame. Stocks just ran out of gas at the end of the Q2 earnings season in late July, and bonds fell upon realizing that the Federal Reserve is (still) committed to defeating inflation.

Combine that with continued weakness in the broader “market of stocks,” the ingredients came together for a very weak August and September. We’ve shown a chart like this before, but here’s an updated look at just how weak the rest of the stock market has been outside of a handful of the largest technology companies:

That chart represents the tiny number of companies driving headline prices higher, but that doesn’t need to be a terrible thing going forward. It means those other 493 companies are continuing to work on growing their earnings, and the lack of price appreciation means you’re getting more earnings per dollar of equity than you may have been when the year started.

And we can say with certainty that your fixed income dollars are getting more return than when the year started and multiples of the return just two short years ago. Price weakness may actually result in higher forward returns.

Risks and Outlook

We’re in a bit of an odd moment by way of monetary policy. On the one hand, interest rates have raced higher on the continued belief that inflation pressures are still lurking and won’t reach the Federal Reserve’s 2% target without continued restrictive policy. However, it’s not as though they’ve been sitting on their hands; this chart displays the rather hawkish behavior we’ve all witnessed:

Data via Morningstar, September 2023

Notice that sharp move higher in 10-year yields in the past few months. This led to mortgage rates approaching 8% vs. the sub-3% rates available just two years ago. One might think that this alone would slow runaway inflation that has the Fed so concerned. We can say that some serious progress has been made in that the rate of inflation has fallen from year-over-year readings of 9% to under 4% in recent months. Take out the supply-induced oil spike, and readings might be even lower. Progress indeed.

We can’t know how much the existing rate hikes have impacted the economy, but we’re keeping a close eye on it as a team. Unemployment has stayed below 4%, but in past tightening cycles, it took a few months before any effect on employment could be measured; see below:

Source: Thornburg Investment Management

As you probably know, offices aren’t exactly the draw for employees that they were before COVID, especially in urban areas. While most smaller companies have been back to close to normal for some time, larger companies are beginning to work their way back to prior policies this year. But the new normal for younger workers seems to be a hybrid approach split between remote and in-office work.

That said, we don’t see a 2008-type collapse in commercial real estate looming. As shown below, everyone “knows” the market segment looks terrible and isn’t big enough to create economy-wide issues. As we know from earlier this year, the banking system alone has more potential of causing widespread trouble.

The point is there are always things to worry about. That’s our job as your advisor. But the concerns you see highlighted in the media are usually factored into market prices, so we spend our energy making sure your asset mix addresses risks of all types.

Defensive Assets Changing

Real yields are actually now compensating investors after being utterly useless for years. It could be better if you’re a borrower, but interesting if you’re a lender. As the great Howard Marks puts it,

“Five years ago, an investor went to the bank for a loan, and the banker said, “We’ll give you $800 million at 5%.” Now, the loan has to be refinanced, and the banker says, “We’ll give you $500 million at 8%.” That means the investor’s cost of capital is up, his net return on the investment is down (or negative), and he has a $300 million hole to fill.”

What might that mean for us as investors? A few things come to mind:

  • Businesses relying on short-term funding may be scrambling to adjust
  • Businesses that locked in long-term funding are sitting pretty
  • Markets are digesting the attractiveness of those businesses

The chart below is wild when you think about it, but it’s no different than a mortgage holder who locked in a 3% mortgage and can now earn 5% on savings. Their comfort level can be quite different from the person with low/no savings and looking to borrow:

We think you can attribute part of this year’s divergence between large and small stocks to the difference in access to long-term capital. It doesn’t break down quite that easily, but it highlights the need to know what you own and why. The era of easy money seems over for the foreseeable future.

Q3 Actions 

There was more activity during the third quarter than in the prior quarter. As market conditions evolved, we felt it was prudent to shift more of our allocations to core positions and trim back on our more active/satellite tilts.

On the growth sleeve, we sold all of the following:

  • Horizon Kinetics Inflation Beneficiaries ETF (ticker: INFL)
  • JPMorgan Equity Premium Income ETF (ticker: JEPI)
  • WisdomTree EM Ex-State Owned Enterprises ETF (ticker: XSOE)

These were smaller satellite positions, and the proceeds went into core equity holdings. We also trimmed exposure in the following:

  • iShares Core Dividend Growth ETF (ticker: DGRO)
  • Aptus Collared Investment Opportunity ETF (ticker: ACIO)
  • SPDR S&P 600 Small Cap Value ETF (ticker: SLYV)

We also rebalanced the following funds in international equities:

  • GQG Partners International Quality Dividend Income Fund (ticker: GQJIX)
  • Brown Capital Management International Small Company Fund (ticker: BCSFX)

Additions to the portfolios were the aforementioned core equity positions:

  • SPDR S&P 500 ETF (ticker: SPLG)
  • iShares Core MSCI Total International Stock ETF (ticker: IXUS)

We did a solid job of renovating the defensive sleeves to account for a lack of real yield in fixed income; now, the opportunity is there to move back towards a more traditional mix. That process started early in the quarter and continued throughout. We sold all shares of the following:

  • Schwab Short-Term U.S. Treasury ETF (ticker: SCHO)
  • iShares AAA-A Rated Corporate Bond ETF (ticker: QLTA)

We also trimmed back the Aptus Defined Risk ETF (ticker: DRSK).

Like in the growth sleeve, these proceeds primarily went to more core positions, as follows:

  • iShares Core Total USD Bond Market ETF (ticker: IUSB).
  • Fidelity Total Bond ETF (ticker: FBND).

A good bit of activity to reflect the shifting environment; we are expecting few changes in Q4 unless we see a significant shift in conditions.


We continue to focus on preparation over prediction and feel good about the way we’ve positioned portfolios for a range of possible outcomes. We view our investment committee’s thought diversity and flexibility as assets in our service to you, our valued clients.

Now, onward to the 4th quarter of 2023.