Nov 7, 2023
TLDR: Equity markets were down for the third month in a row but there may be reason to be optimistic as we head into year-end.
The October Effect describes a perceived market anomaly that the month of October brings financial declines and market crashes. This October was no different, as equity markets for the third month in a row fell across the board. Our actively managed strategies performed about in line with their benchmarks driven by:
Net positive impact from individual stock selection in our Opportunities and Offshore strategies
Reasonable levels of strategic cash that insulated clients from the market’s volatility.
Here’s some quick context on what happened and why, what we did about it, and our outlook ahead:
The S&P 500 and Nasdaq suffered their third straight monthly declines, as both indexes were down 2.2% and 2.8%, respectively. The indexes finished the month around where they were trading in May of 2023 so we’ve essentially round tripped the summer rally.
October saw a flurry of data signaling the resilience of the US economy, including a blockbuster jobs report, strong retail sales data and a blowout GDP print of 4.9% annualized for the third quarter. Ironically, the strong economic data was bad for markets as a resilient economy suggests that the Fed may have to hold interest rates at current levels longer than investors were expecting (something we talked about at length in our recent Investment Committee).
Q3 earnings were in full swing during the month as ~56% of the S&P 500 reported results as of this writing. The preliminary data can be characterized as a “mixed bag.” Companies were rewarded for prioritizing profitable growth while others were penalized for missing expectations. Beta, or market exposure, is often sufficient when a rising tide lifts all boats (in a zero interest rate environment, for example). However, in the more tenuous market landscape we’re now seeing, alpha - or uncorrelated outperformance from active management - is increasingly important.
We sat tight in October as the data rolled in. We were busy prepping our quarterly earnings previews, revising our estimates, and discussing internal recommendations on any action items that might be required moving forward. Most of the time ‘no action’ can be considered an action, but you should expect us to make some updates around the edges following the recent reports.
We remain cautiously optimistic with roughly ~70-85% net exposure across our active equity strategies. This strategic cash functions as “dry powder” to enable us to capitalize on opportunities as they present themselves and has meaningfully helped us over the last 3 months.
Although October was a tough month for markets, we believe there may be a positive set up for stocks and bonds heading into year-end. The U.S. Treasury appears to be leaning more dovish and Fed Chairman Jerome Powell has essentially confirmed the “higher for longer” interest rate environment that lies ahead. With recessionary fears being pushed back by a year or so, we believe that there could be some upside as we finish out 2023.
As an aside, Treasuries continue to yield their highest rates in decades and the “T-Bill and Chill” strategy we referenced last month continues to be attractive. Smart Cash is currently yielding up to 5.36%* and serves as an excellent place to earn extra yield on your cash.
If you have any questions for me or the team, just reply to this email and we’ll get back to you as soon as we can.
Co-CEO and Chief Investment Officer
*Yield is as of 11/6/23. This represents the highest 7-Day Yield currently available among our options. Certain funds have specific investment minimums, which can be up to $3,000. Investors who invest amounts below these minimums may experience lower yields than those advertised. Yields will fluctuate over time, and are not a forecast or guarantee of future earnings.
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