Third Quarter 2023 In Review

Market Overview

This was not a great quarter, to be fair. Stocks and bonds across the board were down. This happens! Sometimes we are up, sometimes we are down. Over 90 days, we were down. But it has been a very good 12 months. It has even been an especially good 12 months for international stocks, with the MSCI EAFE up 25.65%, handily outpacing US large and small caps. Bonds also struggled of late, as rates climbed over the summer. But again, over one year bond returns are positive.

A difficult period in the short term, yes. But difficult is normal. And I know you’re tired of hearing me say this. But this is, in fact, how it goes. Over 10 years now I’ve been writing these quarterly updates. Most of the time, we get good news. Sometimes, less so. The back and forth is why we get higher returns in equity markets than you do at the bank in the long run. It’s the price of admission, and by now we all know it. This quarter goes in the “not great” column and we move on, because quarter-to-quarter, this is mostly noise anyhow.

_{Index performance is provided as a benchmark. It is not illustrative of any particular investment. An investment cannot be made in an index. Past performance is not an indication of future of results. S&P 500, S&P 600, MSCI EAFE Index, MSCI EM Index, S&P US Agg Bond Index. Returns as of 9/29/23.}

Economic Update

Instead of dumping the usual bin of charts and accompanying commentary, I’d rather just chat about the state of affairs this round. I want to talk about perspective, and bias, and our personal experiences and how all of these affect our view of the economy. If we looked strictly at the data, I think we could agree that the current state of the economy is: complicated. Some things look great, even all-time great. Take, for example, the labor force. Unemployment is at 3.8%. Prime age employment, which measures the percentage of the population from 25-54 that is employed, is at 80.9%, levels not seen since the late 1990’s. That’s right, above pre-COVID levels, above real estate bubble levels.

The first myth I want to put to bed today is “no one wants to work.” Clearly, this is false. Not confusing, not complicated, false. Not only does nearly everyone who wants a job have a job (3.8% unemployment), but everyone is working (80.9% prime age employment)! There’s no narrative to spin here. The labor market is TIGHT. Jobs are plentiful, workers are scarce. Period.

This is a result of a number of things, not the least of which is massive federal stimulus coupled with pent up demand coming out of the pandemic. And this has led to inflation. And for us living in the world, working in the world, buying groceries and gas and paying for housing, inflation is a tricky one. Our minds and memories are very sticky. So when inflation jumps from practically zero for the better part of a decade to over 7% for nearly a full year, it stands out. Prices went up, they went up a lot and it happened quickly.

And while inflation has cooled off A LOT (under 4%), that doesn’t mean prices have gone down. It means the rate at which prices are going up (and they are always going up) has slowed. So when people think about “relief from inflation” what they want is for eggs to go back to the price they were in 2019, but that isn’t how inflation works (unless you want deflation, which I can assure you: you do not want that, not at all). So inflation hurts, and it hurts for a lot longer than inflation is truly an economic problem, because we all remember how much eggs used to cost. And we anchor there, to our detriment.

The last huge part of the economy that most of us are faced with on a regular basis is the housing market. And again – things are weird here. For one, we just hit decades-long high mortgage rates. 7.31%! While historically that might be just on the hide side of average, in recent memory it is STAGGERINGLY HIGH. And as a result, the housing market has stopped going bananas, which also feels out of place in recent memory. Prices went bonkers during COVID as most white-collar workers still had jobs but nowhere to go and nothing to buy except to swap houses, and they did. And then inflation spiked and interest rates spiked and mortgage rates too and home prices stopped going up. Not went down, mind you, in any material way. Just stopped going up. The marginal buyer went away because when mortgage rates triple, monthly payments tend to get a bit scary.

But housing is a weird one because most of us aren’t actually affected by this. It feels like everyone either refinanced or moved with a new mortgage during the pandemic, and now we’re sitting around pretty content with our 2.75% 30 year mortgages. If you’re already in the housing market and don’t want/need to move, you’re in a pretty good spot. Market activity is down because if you don’t need to move, you aren’t about to give up that sweet 2.75% rate. So activity is down, borrowing is down, refinancing is a joke, but most of us aren’t impacted by these changes in any real way.

I want to wrap this up with a quick gut check on our personal perspectives, and sadly I am going to touch on politics too. During the Clinton campaign and administration James Carville was famous for his “it’s the economy, stupid” line: if things were good, people voted incumbent. If they were bad, it was time for a change. Today voters are changing the facts to fit their preferred leanings instead. There are much stronger correlations between consumer confidence and political affiliations today than between consumer confidence and economic data. If I can make a plea, it’s this: 1) stop giving credit and blame to the White House, whoever is in there. Politicians at best have marginal impacts on the economy; 2) if you need to have an opinion, try to look at the data instead of listening to the news. You might find that things are a little different than you thought.