Third Quarter 2023 Market Update

Originally published for Vanguard
Edited for clarity & brevity by Gleba & Associates

July helped get the third quarter of 2023 off to a strong start. However, the continued rise in interest rates—which sharply accelerated in September—proved to be too much for the equity markets to overcome, leaving both stock and bond market returns down approximately 4.0% and 3.0% respectively for the quarter. With markets now reversing their prior nine months of strong positive returns trends, it does provide advisors, and the investors they serve, the time to reflect upon and reaffirm their conviction and power of staying the course.

For example, the returns of stocks and bonds over the last seven quarters have been extreme, and oscillating, as seen in the scatter plot in Figure 1. The first three quarters of 2022 (blue dots) posted negative stock returns of –5.4%, –16.9%, and –4.4% and simultaneously negative bond returns of –5.9%, –4.7%, and –4.8%. Then, in the fourth quarter of 2022, performance quickly—and very unexpectedly—flipped for the next three quarters (orange dots) with the stock market providing very positive returns of +7.2%, +7.2%, and +8.4%, opposite of what consensus experts were predicting at the time. Even bond market returns bucked the trend of rising Fed fund rates with returns of +1.9%, +3.0%, and –0.8%.

When zooming out to a longer-term view, one can see what a difference a year makes! Figure 2 shows the distribution of year-to-date returns for stocks, bonds, and a balanced 60% stock and 40% bond portfolio (60/40 portfolio). Last year on September 30, 2022, year-to-date returns for stocks, bonds, and a 60/40 portfolio delivered negative returns of –24.9%, –14.6%, and –20.7% respectively. One year later, as we approach September 30, 2023, the year-to-date returns for stocks, bonds, and a 60/40 portfolio as of September 26th are +11.7%, –1.0%, and +6.6%, respectively. What a difference a year makes!

While you may not remember how you were feeling a year ago, let’s quickly recap what was happening in the markets:

Balanced investors had just experienced the second worst decline in history (–20.7% for a 60/40 portfolio, second only to the year-to-date performance of –23.5% through September 1974).
Consumer sentiment was nearing or at historical lows, as seen in Figure 3.
Inflation, forecasted as transitory by the experts, was still rising and at 15-year highs.
The average forecast for the S&P 500 Index, as reported by Bloomberg, called for a negative return in 2023—the first time since at least 19991.

Given this backdrop, clients de-risking their financial portfolios could have been expected. Equity allocations holding steady while sentiment is low differs from past patterns where equity allocations and sentiment had a closer relationship.