Global equities declined over the quarter despite strong gains in the first half of 2023. Government bonds also posted negative returns as the Fed’s “higher for longer” theme started to sink in.
At a glance
- During the quarter, the S&P 500, Dow and Nasdaq declined 3.6%, 2.6% and 4.1%, respectively, in US dollar terms. Although economic growth remained robust, challenges were mounting, such as a potential government shutdown, rising energy costs, and the resumption of student loan repayments.
- The S&P/TSX fell 3.0% during the quarter.
- In the Eurozone, shares fell amid concerns about rising interest rates, while Asian equities declined due to concerns over the Chinese economy.
- Emerging markets faced challenges from a strong U.S. economy and Chinese economic weakness.
- The fixed income market struggled as interest rates rose, leading to the worst quarter for domestic bonds. Global government bond yields peaked before retreating, with the U.S. 10-year yield rising to 4.57%.
- When long-term yields drop below short-term yields, it often signals an impending recession. As of July 2022, the yield curve inverted and has remained inverted for 14 consecutive months. So, why hasn’t a recession occurred yet? It’s crucial to remember that the yield curve isn’t the sole player in this scenario.
- Tall Oak Capital Advisors’ investment approach benefited from the “risk-off” environment in the third quarter. We benefited from our defensive and diversified asset allocation to large-cap, high-quality companies. Higher energy prices also helped increase the value of our diversified basket of high-quality energy companies.
- We remain cautious while looking for – and finding – investment opportunities. The yield curve inversion and recent changes have created opportunities in fixed income markets. We continue to hold underweight allocations to equities in the financials and utilities sectors and prefer to take advantage of the juicy yields being paid in these issuers through the corporate bond markets while avoiding the volatility of the equites in these industries.
- Despite the higher interest rate environment putting pressure on equity valuations, we are seeing opportunities in thematic positioning, in energy and energy transition, health care, and in dividend-paying stocks.