This quarter has been tough on stocks and bonds so far, and last week was no exception. Tough talk from the US Federal Reserve Chairman and even tougher headlines from the Middle East have not been supportive of investor optimism nor market gains. As for the former, Fed Chair Jerome Powell stressed last week that the economy remains strong, and inflation is too high. In turn, longer-term interest rates moved sharply higher last week, with 10-year Treasuries coming within a bip of a 5% interest rate and hit their highest levels in over 16 years.
For investors in balanced multi-asset portfolios, the good news is that higher interest rates means that core fixed income now has its best expected returns in over 16 years (as the best predictor of a bond’s future return is its starting yield if the bond is held to maturity; adjusted for credit risk). The bad news, however, is that higher rates also put more stress on the stock market in a few ways, including pressuring valuations lower, negatively impacting earnings, and creating higher discount rates which make other investments look more attractive. On that last point, as the saying now goes, TINA (There Is No Alternative) is Dead, replaced by TIAA (There Is An Alternative). Indeed, in this environment, core fixed income and global credit look more attractive.
As for this week, the Middle East and interest rates will again be key drivers of headlines and global financial markets. In addition, we will get some important earnings reports, including from notably names such as Meta (Facebook), Alphabet (Google), Amazon and Microsoft. In total 30% of the S&P is scheduled to report this week. It’s also a busy week on the economic calendar, with Q3 GDP being released and the Fed’s preferred gauge of inflation, Personal Consumption Expenditures (PCE). Regarding GDP, the 3Q23 should have been a strong one. The GDPNow - Federal Reserve Bank of Atlanta (atlantafed.org) is predicting Q3 2023 GDP at 5.4%, as of October 18th, 2023. This is after inflation.
Add it all up...
Stay invested. Stay diversified. Stay disciplined.