Oct 24, 2023

A Change in Trends

Oct 24, 2023
Mark R. Gordon — JD, MPP, CFP®, CFA
Chief Investment Officer
Last quarter, stocks took back some of the robust returns investors enjoyed through the first half of the year.

Overall, global equities were down about 3.5% for the quarter.¹ Emerging-markets stocks held up the best, with a drop of just under 3%.² US stocks were down about 3.25%.³ Developed-markets international stocks gave way the most, to the tune of just over 4%.⁴ Despite this downturn, global equities are still up over 10% year-to-date.

Global bond markets also offered low, single-digit losses. The total global bond market was down about 2.5% for the quarter. US bonds lost more (-3.25%) than foreign bonds (-1.5%).⁵ Continuing a recent trend as US interest rates rise, shorter bonds held their value more than longer bonds, offering small gains (0.75%) in a difficult environment.⁶

Q3 Returns Largely Driven by Conflicting Data

As we’ve often said, today’s market prices reflect our collective wisdom regarding what’s likely to happen in the future. Each day, investors ask themselves “Is this stock or bond a good investment at today’s price?” We can’t predict the future, but each new piece of data provides a hint of what might come. That’s why each new economic headline, e.g., inflation or unemployment data, has an impact on market prices.

As we discussed last quarter, most financial media anticipated – if not trumpeted – a US recession this year. That hasn’t happened, at least not yet. But investors, using that frame, scrutinize economic data to help determine whether the US is heading toward recession. Since midyear, the data have not presented a clear direction.

On the positive side, the rate of inflation slowed and the market’s expectations for future inflation also came down. US Gross Domestic Product (the total value of goods and services) grew and labor markets remained strong.⁷ Conversely, mortgage rates rose over 7%, oil prices hit a 10-month high and US factory orders dipped.⁸

In the absence of a major, global-macro event (but see below) and/or clear economic signals, we don’t expect to see a large move one way or another. And that’s exactly what happened last quarter: global stocks kept within a range of plus-or-minus 4% of their midyear level.⁹

Events in Israel and Gaza Will Dictate Markets Going Forward

On Oct. 7, Hamas crossed the Gaza border and attacked Israeli citizens. Israel has responded, thus far, with evacuation orders and airstrikes in Gaza. We won’t engage in a political analysis here, but our hearts go out to all those impacted by the violence.

As of this writing, global stocks are down less than 2% since the Oct. 7 attack.¹⁰ There are two reasons likely underlying the markets’ rather sanguine response. First, Gaza and Israel represent a tiny portion of the global economy. Second, most analysts do not currently believe the war is likely to spread to one or more of the world’s major powers.¹¹

But that can change. Going forward, the conflict in Israel and Gaza will impact global markets. In fact, we believe the conflict is likely to be the major contributor to market volatility in the near future. If the conflict remains contained or, fingers crossed, reaches a relatively peaceful resolution, we expect markets to turn upward. If, however, the conflict draws in major world powers like the US, China, or Russia, we expect extreme volatility. Moreover, as noted above, each new story or development will likely move markets as investors seek insight as to whether and when we will see a resolution to the discord.

Avoid Predicting the Future

A word of caution: We strongly encourage skepticism regarding pundits who claim special insight or certainty as to the events in West Asia. This situation is incredibly fraught and complex. Neither Israel nor the Palestinians possesses a uniform perspective: moral and political viewpoints vary widely. Combine that with a large array of regional and global allies, each with their own incentives, all operating under the “fog of war,” and the number of potential outcomes increases exponentially. We understand the desire for certainty, and the desire by some to be seen as savvy, but we believe any confident prediction at this early stage does a disservice to the investor.

Instead, we recommend “buckling down” and preparing for market volatility for the foreseeable future. This means (1) making certain you have sufficient liquidity for your short-term needs and (2) confirming your financial-life plan remains relevant. That’s what we are here for. If you have any questions or would like to review your goals and needs, please let us know.

¹ Global stocks represented by the MSCI ACWI Index. All investment returns from Morningstar unless otherwise noted. Past performance is no guarantee of future results.
² Emerging-markets stocks represented by the MSCI Emerging Markets Index (net).
³ US stocks represented by the S&P 500 Index.
⁴ Developed-markets stocks represented by the MSCI EAFE Index (net).
⁵ US bonds represented by the Bloomberg US Aggregate Bond Index and foreign bonds represented by the Bloomberg Global Aggregate ex USD 10% Issuer Capped (Hedged) Index
⁶ Short bonds represented by the Bloomberg Barclay’s US Gov’t/Credit Bond Index 1-3 Years.
⁷ Kliesen, Lower Inflation, GDP Growth Positive Signs for U.S. Economy, stlouisfed.org, August 30, 2023.
⁸ Source: Dimensional Funds Advisors, World Stock Market Performance slide, Q3 2023 Market Review deck.
⁹ Source: Wealth Architects and YCharts.
¹⁰ Source: Yahoo! Finance October 24, 2023.
¹¹ See, e.g., Kaye, Will the War in Gaza Ignite the Middle East, foreignaffairs.com, October 19, 2023.

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