2023 Q3 Market Commentary

I had initially planned to have this whole commentary write itself – literally. Well, almost the whole commentary. All joking aside, my plan was to use ChatGPT to construct the outline so I could then fill in the gaps, showcasing the capabilities of Artificial Intelligence (AI). However, with the current situation in the Middle East, a war in Europe, and a deteriorating political situation in the United States, a more personalized commentary seemed appropriate. AI is not going anywhere and can be discussed another time.

Writing a commentary is challenging when the news is changing day-by-day, even hour-by-hour. As I write this, Israel has declared war on the militant group Hamas in response to Hamas’s assault on the Israeli people, with reports of more than 2,000 civilian deaths and casualties in both Israel and Gaza. It is too soon to tell where this conflict will lead, but the loss of innocent lives is heartbreaking and has put the Middle East and the entire world on high alert. Our thoughts go out to all those in harm’s way, and we hope those in leadership can find a path to peace.

Surprisingly, the initial stock market reaction to the situation in Israel was minimal, but we could see a bigger fallout if the conflict spreads to other countries. Unfortunately, the conflict in the Middle East is not the only ongoing one. War continues between Russia and Ukraine, with Belarus threatening the use of nuclear weapons in response to “aggression” by NATO allies at its border. The war in Ukraine is already awful, but a spill over into neighboring countries would be much worse.

The war in Ukraine is not helping the political situation here in the U.S., either. As the debt of the United States continues to increase, there is greater questioning from many factions as to why we continue to send money to Ukraine. This key issue played a major part in the removal of McCarthy as Speaker of the House, as well as the inability to get a budget passed. That issue was kicked down the road by passing a short-term budget, but that fight will be back in November. Additionally, political bickering has left the United States without an ambassador in Israel, Egypt, Kuwait, Lebanon, or Oman at a time when we need strong diplomacy in the area. This year we’ve seen our elected officials fight over raising the debt ceiling, passing a budget, and electing a Speaker of the House – and we still have a presidential election looming ahead. As discussed in past commentaries, investment markets generally do not like uncertainty. Please note, these comments are not meant to show the political leanings of the writer of this commentary (or of Persium Group) but to examine how the political environment can affect the stock market and economy.

Even with that turmoil domestically and abroad, it would appear the stock market has done well in 2023. While that statement is true based on the headline number alone – the S&P 500^[1] was up 12.1% through the end of the third quarter – it is important to dig a little deeper.  Remove the Magnificent Seven from the S&P 500 and the return falls to only 1.8%. The Magnificent Seven refers to Apple, Microsoft, Amazon, NVIDIA, Alphabet, Tesla, and Meta, which all returned over 92% on average.^[2] Those seven stocks now account for almost 30% of the S&P 500, which is a record. While it is good to see the stock market doing well, it poses a risk when it is consolidated in a few stocks. Smaller companies’ stocks are up far less than the S&P 500, with the Russell 2000 Index^[3] up only 2.54% through the end of September. International markets have also trailed the S&P 500 with the MSCI EAFE returning 7.08%.^[4] This has caused large cap U.S stocks to appear overvalued when compared to smaller cap stocks and international stocks.

Apologies in advance, but I am about to introduce a lot of data to illustrate what is happening in the fixed income markets and to show the risks in chasing yield (income).

Disclaimer: The above investments are shown for illustrative purposes only and are not intended to be a recommendation. Yield is based on 30-Day SEC Yield and has been provided by BlackRock, Inc.

The chart above shows three different exchange-traded funds (ETFs) invested in existing U.S. Government debt and maturing at different times. SHY is considered short-term, IEF is intermediate-term, and TLT is long-term. While all investments have increased their yield, two have a negative total return for 2023, which consists of yield plus or minus the change in price of the investment. The other investment is slightly positive in terms of total return. The main reason for this incongruity is that the Federal Reserve (Fed) has continued to raise interest rates in 2023. After raising rates by 4% in 2022, they have raised rates another 1% since the start of 2023. The longer the time frame (duration) of a fixed income investment, the more the price is affected by interest rate movements, which is why TLT is down 9.00%. Yield can be an attractive source of income, but there are risks, as evidenced by the total return of TLT.

What about cash? Well, “Cash is Back” and “King Cash” are two sayings that I keep hearing. Yes, cash and cash equivalents like CDs, money markets, or T-Bills are once again a popular investment, returning anywhere from 4% to 5.5%. While this is a solid return with minimal risk, too much cash can lead to missed opportunities. At some point we will see the recession that economists have been warning about for the past eighteen months. When this happens, lowering interest rates is one tool the Fed uses to jumpstart the economy. Refer back to the chart above and imagine what might happen to fixed income when interest rates go down. Fixed income investments continue to generate income but should also see capital appreciation (an increase in the price or value of the investment). The longer the duration of those investments, the more potential there is for appreciation. Therefore, we feel it is appropriate to have a fixed income portfolio with various durations, not just cash.

These are uncertain times, but they do not deter us from our core belief. Long-term financial success is achieved by having a solid financial plan and staying diversified. However, one must take opportunities when and where appropriate, such as keeping more cash now than you might normally maintain. This is a balancing act, however, as keeping too much cash over the long term can eat away at your purchasing power due to inflation.

I realize this has been a somewhat somber commentary, and it is about to get worse. The Braves’ historic season was cut short by the Philadelphia Phillies (again), but let’s end on a positive note. As of this writing, the Georgia Bulldogs are still undefeated and chasing their third consecutive National Championship. They would be the first team since the 1930s to achieve this accolade. (I hope this is still the case by the time you read this).

As always, please reach out if you have any questions.

– Will Bowen, Relationship Manager

The views and opinions expressed are of Persium Advisors, LLC. This commentary is provided for educational purposes only and should not be construed as investment advice. Persium Advisors is an investment advisor firm located in Atlanta, GA.