The market moved higher in July before reversing course in August and September. Energy names reclaimed their leadership in the third quarter as West Texas Intermediate (WTI) Crude Oil went from $70 at the start of the quarter to +$90 by the end following a series of OPEC oil cuts. The largest companies continue to lead, despite the recent pullback, with the weight of the top 10 companies in the S&P reaching 31.9%.
After raising rates another 25bps at their July meeting, the Federal Reserve held rates flat in September leaving the benchmark federal funds rate at 5.25-5.50%. Despite the pause, Fed projections still imply one more rate hike this year as they wait for convincing evidence that inflation is under control. Chair Powell continues to speak of ‘higher for longer’ with the Fed’s dot-plot indicating only two rate cuts in 2024, down from four at the June meeting. However, the inflation problem appears contained with core PCE continuing to trend lower, hitting 3.9% in August while the 3-month annualized PCE sits at 2.9%. If you look at Core CPI excluding shelter, the numbers look even better hitting 2.3% YoY. Meanwhile the Federal Reserve Money Supply M2, stayed in negative territory down 3.7% over the last year.
The US 10-yr Treasury yield rose to new highs, ending the quarter at 4.57%, a level not seen since 2007. US pending home sales hit its lowest level since 2020 as mortgage rates hit a 20+ year high at 7.3%. Despite the weakness, home prices remain firm, hitting a new all-time high in July as supply continues to be constrained.
China is showing positive signs after a series of stimulus measures taken by the government earlier in the year. China’s official manufacturing purchasing managers’ index (PMI) readings moved back into expansionary territory in September hitting 50.2, the highest level in 6 months. However, trouble in the Chinese property market is flaring up as default risks become front and center across multiple developers.
The Dow Jones Industrial Average declined the least in the quarter losing 2.1% followed by the S&P500’s loss of 3.3% and the Nasdaq Composite’s decline of 3.9% in the third quarter. Nine out of the eleven sectors in the S&P500 posted negative returns during the period, opposite of what we saw in the second quarter. Energy reversed its downward trend for the year, gaining 12.2% while Telecommunications posted its third positive quarter gaining 3.1%, the only sector to be positive every quarter this year. Utilities were the biggest losers, a trend we have seen throughout the year, declining 9.3% while Real Estate fell 8.9%.
Despite the pullback, Large-caps maintained their leadership outperforming both mid-caps and small-caps. The Russell 1000 lost 3.2% compared to the Russell Mid-Cap Index’s decline of 4.7% and Russell 2000 Index decline of 5.1%. Growth did marginally better than value, with the Russell 1000 Growth Index losing 3.1% compared to the Russell 1000 Value Index’s decline of 3.2%.
Bonds faired far worse in the quarter, with long-dated US Treasuries losing 13.0% while US Corporates did better with the Bloomberg Aggregate declining 3.2%. The US Dollar gained sequentially rising 3.2% but is still down 5.3% YoY. OPEC cuts finally had an impact on oil prices with West Texas Intermediate (WTI) crude gaining 28.5% during the quarter pushing prices up 14.2% YoY. Gold declined 5.2% during the period while Bitcoin lost 11.5%.
Data sourced by Bloomberg.
The NASDAQ Composite Index is a market capitalization-weighted index that is designed to represent the performance of NASDAQ securities and it includes over 3,000 stocks. The S&P 500 Index is a market capitalization-weighted index of 500 widely held common stocks. Investors cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges. The Dow Jones Industrial Average (DJIA) is an unmanaged index composed of 30 blue-chip stocks, each with annual sales exceeding $7 billion. The DJIA is price-weighted, reflects large-cap companies representative of U.S. industry, and historically has moved in tandem with other major market indexes, such as the S&P 500. The Russell® 2000 Index is a small-cap stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index. The Russell Midcap® Index, an unmanaged index, measures the performance of the 800 smallest companies in the Russell 1000 Index. The Russell 1000® Index measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index. The Russell 1000 Growth® Index measures the performance of those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth values. The Russell 1000 Value® Index measures the performance of those Russell 1000 Index companies with lower price-to-book ratios and lower forecasted growth values.The Bloomberg USAgg Index is a broad-based flagship benchmark that measures the investment grade, US dollar- denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency). West Texas Intermediate (WTI) Crude Oil is the underlying commodity of the New York Mercantile Exchange's oil futures contract and serves as one of the main global oil benchmarks. CPI: Consumer Price Index measures the monthly change in prices paid by U.S. consumers. PCE: Personal consumption expenditures includes a measure of consumer spending on goods and services among households in the US. PCE, CPI, and inflation rates based on available data at the time the piece was written and are not guaranteed to stay the same in the future. M2 is the U.S. Federal Reserve’s estimate of the total money supply including all of the cash people have on hand plus all of the money deposited in checking accounts, savings accounts, and other short-term saving vehicles such as certificates of deposit (CDs).
The views expressed in this commentary reflect those of Patient Capital Management analyst(s) as of the date of the commentary. Any views are subject to change at any time based on market or other conditions, and Patient Capital Management disclaims any responsibility to update such views. The information presented should not be considered a recommendation to purchase or sell any security and should not be relied upon as investment advice. It should not be assumed that any purchase or sale decisions will be profitable or will equal the performance of any security mentioned. Past performance is no guarantee of future results.
©2023 Patient Capital Management, LLC
Share