“Off the Wall” Podcast

Q3 Market Recap | Surprises with Interest Rates, Stocks, and Inflation, Plus Our Cash Flow Strategies & Predictions for the Rest of 2023

Oct 05, 2023 Investing & Portfolio Strategies

As we enter the last fiscal quarter of 2023, we always love to reflect on the Q3 market (and YTD) to see what we’re surprised by and the major takeaways from the data. In this quarterly recap episode of Off the Wall, hosts David B. Armstrong, CFA and Jessica Gibbs, CFP® are joined by our Portfolio Management team, Erin Hay, CFA and Nate Tonsager, CIPM.

Tune in to hear our Q3 2023 recap, where we review the market’s best and worst performing sectors, taking a realistic look at inflation and deflation in 2023 and offering advice on cash flow management. The team breaks down the benefits of using a bond ladder strategy in cash flow planning and the possibility and probability of deflation and lower interest rates in Q4 and into 2024.

“Consumer spending is sustainable, the job market is remaining strong, and inflation is coming down naturally, and the Fed is now signaling they’re done. I’m gonna be a little hyperbolic and say I don’t see the hole in their argument right now. [The Fed] just deserve[s] a little bit of praise.” – Nate Tonsager, CIPM

Stay tuned for a full market recap of 2023 coming in January 2024! We can’t wait to see who will win a Jimmy John’s sandwich for most accurate market predictions!

Are you looking for clarity, conviction and unfiltered advice about your wealth?

You’ve come to the right place.

Episode Timeline/Key Highlights

[00:58] Q3 Market Summary – What happened last quarter?
[02:23] Highest and lowest performing market sectors of Q3 of 2023.
[09:43] Building out a bond portfolio – Duration, returns, and cash flow planning.
[18:43] What surprised us about interest rates, stocks, and inflation in Q3 and YTD.
[29:39] Final Advice/Major Takeaways from Q3 of 2023.
[34:03] Were our 2023 market predictions right?

Resources Mentioned

J.P. Morgan Guide to the Markets: https://bit.ly/48I0YbY

Follow our Portfolio Management team on LinkedIn


Jessica Gibbs, CFP® [00:00:33] Hey, everyone. Welcome back to Off the Wall. Dave, hello!

David B. Armstrong, CFA [00:00:36] Yes, hello. It’s our it’s our famous and and Viral Quarterly Review podcast. Going back at there. I mean, I’m telling you, it’s like tomorrow. Are you going to see on the news that Taylor Swift will be second on the evening news to this podcast in this popularity?

Jessica Gibbs, CFP® [00:00:56] So the Swifties are coming.

David B. Armstrong, CFA [00:00:58] That’s that’s where this is going? Yes, exactly. Can we get a swift to like can we get Taylor Swift, like, intern here or something or just like, pose in front of the door? I don’t know.

Jessica Gibbs, CFP® [00:01:06] No. Great dream, Big Dave, But no, no, Steve. All right. Yes. So as Dave said, we’re back with our our very popular series of quarterly market reviews. Also, we’ll be talking to you today. We have, as always, Erin Hay and Nate Tonsager from the Monument Wealth our asset management team. Hey, Erin and Nate.

Nate Tonsager, CIPM [00:01:25] Hey there.

Jessica Gibbs, CFP® [00:01:27] All right. So I want to dive in, as is our typical structure. Dave, I want you to give me a high level overview. What happened in the quarter. Also would appreciate some context for your date because I feel like, you know, the quarter and maybe what’s happening your date, those are a little different stories and I think it’s always helpful to remember what’s the bigger context.

David B. Armstrong, CFA [00:01:44] Yeah, and you know, and even even more on that, you know, 12 months trailing is a different story. Three year trailing is generally so yeah. But yes, we’re here talking about the third quarter, so we’ll focus on that. So, you know, cue the cloudy music. The S&P was down about 3.3% for the third quarter, but it also remains up 13.1% year to date. So, you know, I know we gave some back in the third quarter specifically in September. It’s really hard to keep watching the market, keep going down like that. But the S&P 500 did finish Q3 at 4288 and you compare that to the January 22. So January 22, all time high of 4797. So it’s still about 11% down from that all time high. And a little wonky here. But, you know, the S&P 500 is trading at a multiple a forward PE multiple. So what that means is they use the earnings that are projected for the 12 months coming up. So forward price to earnings ratio of 17.8%. And historically, the forward p e on the S&P 500 is 16.76. So it’s a percentage point higher than historical. But, you know, it’s not like we’re overextended in valuations or anything like that. So I actually look at that as being a pretty healthy valuation. It’s not frothy out there. Year to date, the three best performing sectors are communications services at positive 40.4% year to date 40.4, technology sector was up 34.7% year to date. And the consumer discretionary is coming in the third best performing sector at positive 26.7. Now losers. Year to date, health care was down 4.1% year to date, real estate’s down 8.1% and utilities are down 14.4%. But what’s interesting or noteworthy is that if you look back at the three best performing sectors since the March 2020 low, so like COVID right through the end of the third quarter of this year, energy is the best performing sector at a positive 349% return off that low technology is 143%. So like energy at a2x over technology, but you really just don’t hear that much about people talking about energy. Everybody is talking about tech, tech, technical tech. And then industrials is up 121% of that March 2020 low. So I find it interesting that two of the highest returning sectors, energy and industrials, weren’t even in the top or the bottom of the 2023 year to date winners or losers. So just sort of an interesting little tidbit there about stealth rallies, stealth returns, diversification, the whole song and dance.

Jessica Gibbs, CFP® [00:04:46] All right. Well, I like good news as we know. So I want to narrow in on what performed well in Q3 2023. And Erin, I want to start with you.

Erin Hay, CFA [00:04:56] Yeah. So it’s kind of piggybacking off of Dave, what you said, really the only sector with any strength whatsoever this past quarter was energy up double digits during the quarter. The next best performing sector is up only about a percent or so. I believe it was financials, actually. I don’t have the exact chart up here, but just kind of calling back to a piece we put out on the blog a couple of weeks ago. A reminder RRG stands for relative rotation graphs. And just as a kind of a synopsis of that blog, it’s a visual way of depicting relative strength among really anything. But in this case, we’re going to we’re going to call out sectors here since we’re talking about the broad market and going back to energy, it’s the only sector that’s residing in the green we call leading quadrant right now. And outside of that, there’s not a whole lot of there’s not a whole lot of good news in these other sectors. Health care appears to be proving a little bit on what we call a weekly basis. But nearly everything else is kind of sort of rolled over and indicates a bad, quote unquote, heading from a momentum perspective. Again, that’s that’s more of a short term look at the market when you break things out on a monthly or even a yearly basis. The the picture looks a lot different. And of course, you can you can pop open even underperforming sectors like like utilities in this instance that you could find, quote unquote, good stocks within there, although I would guess there’s probably not a whole lot of good stocks in there right now. But that’s really been the the only thing that’s been working in the third quarter, which ended on September 30th.

Nate Tonsager, CIPM [00:06:30] You know, I think one thing that jumps out to me as a top performer in Q3 is kind of a story that’s been playing out in all 2023, and that’s the Magnificent Seven stocks is what they are being coined. So the big tech names that we talked about, I know Dave Erin, you guys talked about energy, that number two performer you mentioned, it was tech. So it is contributing some performance that you’re seeing. Oh, a long term in in this year, specifically in Q3, though, within that basket, you did start to see some dispersion. So what I mean by that is the biggest names like Apple and Microsoft, those had very tough Q3 with, you know, Apple being down 11 and a half percent, Microsoft being down seven. So that’s kind of why you saw some the pullback at the index level. It’s kind of a story we’ve been talking about all year. I’ve written about it earlier, is indexes have become over concentrated in some of those names. So it’s tough to see index level performance when their top names are the laggards. Now good news because we we do want to talk about good news and it’s maybe how you frame it in good news is one of the other things that really underperformed in the quarter was duration. And so U.S. long term treasuries and we proxy that by an ETF, TLT is the ticker. So long term U.S. Treasuries again was down 13% for the quarter. So those are your long term bonds were down 13%. And that’s really what happened in Q3 was the story. And I think we might talk about it a little bit later. But the adjustment that’s happening in the markets right now is as the Fed and we’re seeing some of the data come in, investors are adjusting the long end of the yield curve to bring it closer to the short end. So as I mentioned, long term bonds were down 13%. Short term bonds were about flat for the quarter. So what that does is people have been talking about an inverted yield curve for so long and that’s a predictor of recession. Well, that kind of is naturally now on inflating at least to some level as long term yields are moving higher. In short term, yields are staying flat. Now, it might not be great news for stocks as long term yields move up or interest rates move up. It’s definitely not positive for bond prices and that inverse relationship as that yield goes up and bond prices go down. So similar to what we talked about earlier with the S&P being down about 3% for the quarter. Bonds, if you look at the ticker AGG or the ETF, that is the U.S. bond market also down about 3%. So we’re seeing that a little bit of adjustment. We saw a lot of it in 2020 due to the new interest rate regime. I think we’re seeing kind of that final step now as the yield curve flattens.

Jessica Gibbs, CFP® [00:08:53] Dave, anything to add?

David B. Armstrong, CFA [00:08:55] I’ll add one word as to what’s performing well in Q3, and that’s cash. I mean, when you think about cash yielding money market funds yielding 5%, that’s I can’t that’s been 20, 30 years. I mean, not 30, but a long time, at least 20 years since we’ve seen cash yielding that much interest. So to me, that’s what’s performed really well in Q3 when you can. And we always espouse the same advice, right? Hedge your equity market, short term volatility by having a pool of cash that you can draw on so that you’re not forced to liquidate assets to raise cash when they’re, you know, at a 20% or some sort of if pull back or sell off. And if you’re raising that cash and you’re earning 5% on it, I mean, my gosh, that’s that’s better than most dividend paying stocks. So to me, that was a that was a huge, you know, what performed well, too. But I also look at some of the returns with bonds like Nate was just talking about. And if you look at I’ll just pick the Vanguard Total Bond Market ETF and the ticker is BND, Bravo, November Delta. And if you look at that, the seven year total return on that ETF is negative. That’s crazy. Seven year total return in the U.S. bond market is negative. Okay. Why? Well, Nate, kind of Nate kind of touched on before. When interest rates go up, the value of bonds go down. And it shouldn’t be a shock to anybody listening to this that we’ve seen one of the fastest increases in interest rates in a long time, if not in my lifetime. And that means bonds have sold off. But and we’re going to get to this a little bit later. But if you’re of the opinion that bonds that interest rates have maybe come very close, if not at the peak right now, and we know the inverse is true, that when yields go down, bond prices go up. You know, even though bonds have a negative return over the past seven years, if you took cash right now or you sold some equities and built out a bond portfolio for the next ten years, you’re probably going to be looking at some historically high yields in a bond portfolio that you build, not to mention any possible price appreciation when interest rates start going down. So a little sidebar there, but that’s that’s actually what’s happening.

Jessica Gibbs, CFP® [00:11:12] It’s an interesting thought. Yeah, I know we’ve been talking a lot with clients over the past couple of quarters as far as like, you know, they have uncertain cash needs coming up and, you know, it feels strange to keep money in cash. Like if you’re like I may or may not need this in like a year. I don’t know what I don’t necessarily know what to do. And and I feel like that’s been the consistent refrain is that it is okay to be in cash right now because of that yield that you’re getting.

David B. Armstrong, CFA [00:11:35] So, yeah. And bonds right now, they feel like a one way conversation still even I mean like look, if you’re not if you’re not talking about bonds, if you’re not interested in talking about bonds right now, you will never be interested in talking about bonds. So just, you know, put a tick mark next to that as I just want to be 100% equity for the rest of my life. If you have any interest in having bonds at inside of a diversified portfolio, everybody should be paying a little bit more attention to what’s going on right now. Hmm. Commercial over?

Jessica Gibbs, CFP® [00:12:07] Well, I have I have one sort of thought. I mean, like you kind of mentioned, like building out a bond portfolio for the next ten years that may have just been anecdotal or like an example, but like like if you were someone right now who’s kind of looking at their portfolio and saying, you know, I don’t really have bond exposure, I hear what you’re saying. I think maybe I maybe I would like that or I need some more diversification. Like I am not that person who just wants 100% equities versus my life. Like, are you you know, would you think about it in terms of like a ten year duration bond portfolio or or or does the circumstances sort of matter? Like, do you have some general thoughts around duration of building out a bond portfolio?

Erin Hay, CFA [00:12:44] The only thing I’d say are if if you need a if you need bonds and I’m speaking to this topic with sort of a planner hat on. So thinking of bonds as a cash flow tool rather than an asset allocation diversification decision. Yes. Bonds right now. And if you look at how we manage our models more generally and you look into things like flexible asset allocation, what’s something we always espouse, which is following trends. Right now the trend in bonds is horrific. Yields are going up, prices are going down. That’s that. And now you’ve even called it out like TLT. If you go out and you extend your quote unquote duration and you go out and buy long term treasuries. It’s been horrific. They’re down 13% last quarter alone. So I am speaking to Bonds right now purely from the standpoint of cash flow planning. And you’ve got ten year bonds right now, the ten years just shy of 4.7%, potentially closing in on 5% in. It’s something I think is underappreciated by people. David, you talk about cash performing well, 5% in cash. That is not a locked in rate by any means. That is a variable interest rate, daily.

David B. Armstrong, CFA [00:14:04] Very true.

Erin Hay, CFA [00:14:09] Yeah. We could have a disaster. And overnight the Federal Reserve could drop rates to 0%. Sure could happen. We could have a disaster overnight and the Federal Reserve could drop rates to zero now. Chances are it’s not going to happen. A low probability, but it could happen. So you’ve got to think of the tradeoff here. What would you rather have? Would you rather have 5% and something that’s daily liquid? But the rate is variable and can change dramatically in a short period of time. Or would you rather lock in rates for ten years at close to 5%? And reminder, people I mean, I know we take this for granted, that 5%, that’s not a that’s not a cumulative fight. That is 5% every single year. So this is sort of a call to if you’ve got the ability to do so and you’ve got some cash and you’ve. You have a means of picking up that much yield on an annualized basis. Look at locking in a bond ladder. Despite what price trends in the bond markets are telling you. And the last thing I’ll say and I’ll shut up about it is you don’t have to jump all in into a ten year bond ladder. Typically, how we do it at Monument, how a lot of other groups will do it too, is you go into what they call a ladder, so you’ll buy bonds, you know, at ten years, 11 years, so on. And you also have bonds at the short end of the yield curve. And what happens is let’s just say you’ve got a five year ladder once a year or your one year bond matures, you go by five years out and it just stair steps down. So that typically can alleviate some pain and increasing interest rates. It’s just a laddered approach.

David B. Armstrong, CFA [00:15:45] Yeah, and in a great way to think about a bond ladder if that term doesn’t isn’t intuitive or something that you totally understand. If you imagine yourself climbing a ladder up and you’re your foot, you step up and you step off of one rung and onto the next one up, what you’re doing is you’re taking the rung that you just stepped off of and putting get it back at the top of the ladder and you keep climbing up. So what you what you could conceivably do is create an infinitely long ladder that you just keep climbing one rung at a time. And that’s really what’s happening is that when a bond matures, you take the money from that maturity and you put it at, let’s just say we’re doing a ten year ladder, you would buy a new ten year bond because the ten year just became the nine year left. That’s what a ladder means. And Erin, I agree with you. The it’s really important for cash flow plane to understand that if you subscribe to our theory of hedging your equity risk by having 12 to 18 months of cash, you’re the decision to do that now should be much easier than it was a couple of years ago when you’d say, Yeah, but that cash is gone isn’t going to earn me anything. You don’t that you’ve taken that out of the calculus right now. However, and I hope to God something like this never happens again. But after 911 happened, I mean, interest rates went to zero very, very fast. So that could happen. Now, that doesn’t mean your cash loses value. That just means you’re not going to earn interest on it anymore. So to Erin’s point that if you’re sitting down and doing the planning process with somebody like Jessica, Emily Dean and Heaven on the planning team and you’re saying, I know I have this cash obligation for the next let’s just use college education. I’ve got two kids. They’re separated by four years. So I got eight years of college education coming up that I need to start paying for. You could buy a bond ladder right now, an eight year or a ten year bond ladder that’s going to produce that guaranteed income so long as there’s not a default on the on the underlying security, you’re going to have that projected cash flow to pay for college. And at the end of the at the end of the bond maturity, you get your money back so long again, so long as there isn’t a default. That’s a really great way to start planning for cash. And now is a fantastic time to do it. And yeah, we’ll see the trend change. It’s a terrible from a trend perspective in a strength strength. But, but the minute interest rates start coming down, that trend is going to change. So you can kind of look at that as the trigger like when they start. And I’m going to talk about interest rates here in a minute, so I’ll just shut up.

Jessica Gibbs, CFP® [00:18:00] So, yes, all that is to say is find yourself a good wealth manager who you can talk to about building a bond later. That’s custom to you.

David B. Armstrong, CFA [00:18:07] Yes, I know, I know. I know a great wealth management team.

Jessica Gibbs, CFP® [00:18:10] But they get all married.

David B. Armstrong, CFA [00:18:11] Yeah, I’m just saying. Right? I mean, you know, I’m a little partial.

Jessica Gibbs, CFP® [00:18:16] Anyway, all right, well, let’s talk surprises both both in the quarter and year to date. And I know Erin or any one of you want it, guys want to start.

David B. Armstrong, CFA [00:18:25] We already talked a lot about interest rates. So my surprise is going to be adjacent to that fact that we’ve had interest rates rise as fast as they have. Dave, It was either Dave or Nate said something about, you know, rates have gone close to 5% in such a short period of time. And you even said TLT, which is the long term Treasury ETF that was down 13% alone last quarter. Related to that as rates continue to rise. My the biggest surprise for me is we haven’t seen any other defaults or hints of defaults or stress in the banking sector, which is is actually pretty interesting because when you get a severe move in rates in such a short period of time. That typically doesn’t bode well, particularly for the banking system. So banks have been pretty resilient here over the third quarter. And in fact, I’m going to call back out to our relative rotation graph. Again, we talked about energy being in that leading quadrant, XLF, which is the this sector Spider ticker for financials. A very large component of that are banks. That was the third worst performing, I’m sorry, the third best performing sector. During last quarter it was down only 1%. So in essence it was flat. And if you go back to that RRG plot, it is the only other sector of the 11 that is skirting the improving into leading quadrant. So it actually looks pretty decent from a relative return standpoint, which again, given how fast interest rates are moving, how much they moved, that’s a bit surprising to me.

Nate Tonsager, CIPM [00:19:56] I think Erin brings up a good point that an expected negative economic data point or market data point, maybe it is going to be failures or defaults from the highlight from the move in interest rates. You know, we haven’t seen that. And I want to touch on two other data points, but I think the big point that I’m really coming to in Q3 is the Fed deserves some credit. A lot of people in the financial media like don’t enjoy giving federal agencies credit, but really they have nailed it. And I understand why people didn’t want to give them the benefit of the doubt. Historically, the Fed has not always been perfect at navigating past inflation cycles. The eighties is a good example, with double dip recession and inflation coming roaring back. There’s arguments that they held interest rates at zero for too long. But looking at just the instance of them hiking, they’ve really walked the financial financial policy tightrope and kind of are nailing it. And the reason I say that is really from two data points, it’s really inflation and the jobs market, which is their dual mandate and what they’re meant to do. The job market is essentially when you look at the unemployment rates has remained relatively flat since beginning of last year. And during that time we’ve raised interest rates to near, what, five and a half percent over 5%, and they’re projected to stay there for years. That should have been something that a lot of investors, I think would have crippled markets. If you’re looking over the long term. Yes, there’s been pain. Dave, you mentioned we’re still 10% off the all time high, but we’re stabilizing. And the big reason for that is what you’re seeing in the inflation trends. You look at a headline, I like to look more at core inflation personally, and I wrote about that in a recent piece. What core inflation does is it removes volatile swings in energy and food. They are a key piece of inflation, but sometimes they move for reasons that aren’t more long term or systemic. So a core inflation is really made up of goods, services and housing. Goods had a lot of effects from the pandemic where we saw demand spike prices and we’ve seen it come back down to zero, sometimes even negative in some cases. When you’re talking about housing. Dave, you’ve mentioned it and I think we can talk about it as much as this panel kind of wants to. But housing is a lagging, especially a lagging economic indicator, especially the official data series, when you’re looking at more current ones and Zillow has a good one of observed rents, you’re seeing that already rolling over back to a 2% level. So while the official data hasn’t caught up yet, if you’re looking more at the real time metrics, housing inflation is kind of I don’t want to say this. I mean, knock on wood under control. The last piece is services, and that’s driven by wage growth. And wage growth is something employees, workers, the economy needs to sustain because we need to maintain purchasing power as inflation goes. If that’s the one piece of inflation that remains above pre-pandemic trends, that’s fine, because for a long time, with 0% inflation, low wage growth is okay. What you want to see is real wage growth. And if you look at the current measures you’re seeing of disposable personal income, which is a statistic of incomes across especially adjusted for real, so adjusted to inflation, those are still positive. All that says is consumer spending is being able is sustainable. The job market is meaning strong and inflation is coming down naturally and the Fed is now signaling they’re done. I’m going to be a little hyperbolic and say I don’t see the whole in their argument right now, and they just deserve a little bit of praise. No one’s saying it. So that’s why I’m being maybe a little more strong than I will be. A lot of doubt it still unfold. They could pivot, everything could collapse and we’d sure about. But for now they deserve their moment in the sun.

David B. Armstrong, CFA [00:23:21] Yeah. It’s also the seventh inning, though, you know, so. Right. Fair. So fair. I do I do think some of the things that that the market’s a little skittish about right now is you know, will they or won’t they stop or, you know, increase again and you’ll get on the news, you’ll hear somebody I don’t know all their names, but somebody will get on the news and say, you know, we may have one more rate hike left. And I think people look at that and they say, well, wait a second, right? Because now we’ll get to my my surprises here. So I’m going to I’m going to string together a bunch of data that that each individually I find surprising. But then I will I will unveil my. Big surprise at the end. So everybody just buckle up. Okay, Here we go. Surprises. Mortgage rates at 7.31%. 30 year fixed rate mortgage with pending home sales at the are at the same level. Now, pending home sales as they were in April of 2020, which by the way, in April 2020, the economy was basically shut down. Right. So ouch. Core PCE, which is the Fed’s preferred measure of inflation, has declined from its peak and is currently at about 3.8 3.9%. And it’s still falling. Okay. The M2 money supply, one year percentage change has gone from the COVID skyrocketing year over year change of 26.9% to 27% increase in the money supply to now at a -3.7%. So, you know, money is out. Is is negative money growth. Okay. And then U.S. monthly rents are about 1.2% lower now than they were a year ago. And that’s kind of to Nate’s point about, it’s a lagging indicator. So if rents are at a 1.2% lower than they were a year ago, and that’s an eight month lag in piece of data, my big surprise is that no one is talking about the possibility of deflation. That’s my big surprise.

Nate Tonsager, CIPM [00:25:24] And Dave, I think you bring up a really good point with the doubt with the data we’re talking about is a soft landing doesn’t mean no pain. It means that there will be some pain, but they want to keep it manageable while we adjust. So it could be bumpy from here. And I think having a wall of worry is always healthy for the markets. When I get nervous about the markets is when no one is saying anything is wrong with the possibility of deflation, like you just mentioned, student loan payments. If we’re going to talk about current topics, energy, you know, costs spiking, there still is some of that out there. So as much as I want to shine on the Fed, they’re seventh and great.

David B. Armstrong, CFA [00:26:00] But but I’ll also tie this back to the conversation that the three of us, the four of us are all having about a bond portfolio, which is, okay, let’s just say that there is this you know, I like to talk about possibilities versus probabilities, Right. Is it possible that interest rates continue to go up significantly from where we are right now? Of course it is. Is it probable? I think it’s more probable that we start seeing easing of interest rates. Then we see multiple continued iteration of Fed hike. So with all of that data that I just threw off and the specter of deflation, which again, I think the big surprises, not many people are talking about that. But when I look at those pieces of data, I say the probability of interest rates going down is higher than interest rates going up. And if I am wrong. Interest rates going up are not infinite. We’re talking about maybe 25 more basis points. So back to the bond thing, if you’re like, okay, I like to buy and sell low and I like to project out cash flows that I can count on for the next ten years. But I’m back to the Bond thing. I’m back to the Bond thing. So and I’m not saying everybody should have bonds, right? I’m just saying that if you have a need to project some cash flow, constant, consistent, reliable cash flow. Bonds. Bonds. Hey, Bonds.

Erin Hay, CFA [00:27:21] Just want to clarify your comments, Dave, on on buy, sell low. You mean that in terms of yields and not on.

David B. Armstrong, CFA [00:27:28] That’s correct. I’m sorry. Thank you for the clear package, right? Right. Yes. Right. Because when yields are high and they go down your the bond, the prices of bonds you buy right now will increase in value. So thank you. Yes, they can get tricky sometimes, so. Okay. That’s that’s my big surprise. No one’s talking about deflation.

Jessica Gibbs, CFP® [00:27:46] So let’s zoom out and you guys talk about what to do with all this information that we’ve talked about thus far.

Erin Hay, CFA [00:27:52] We’ve already pretty much covered what what I at kind of was thinking for for for us and why you’re talking about this section, which is, hey, look to lock in some yield right here. Don’t hold out for another 0.25% from another rate increase or or don’t think you’re going to be able to completely call the top and yields because you’re not. Nobody can. Don’t be afraid to lock in long term yields at this point if it’s appropriate for you and you’ve got a defined cash flow need because a bond later, absent any defaults, is a pretty damn good cash flow tool for you, very transparent, moderately liquid and can be customized to you. And you know, Nate, Dave and myself were the we’re the ones that can help you do that. So don’t be afraid to lock in some yield.

Jessica Gibbs, CFP® [00:28:41] Hmm. Nate, How about you?

Nate Tonsager, CIPM [00:28:43] I mean, to beat a dead horse we always talk about. I mean, it’s cash flow management, so I won’t talk about that a whole lot. I’ve kind of flip it and talk about the other side. It not the cash that you’re generating. It’s also the cash that you’re paying in debt. So interest rates, there’s a two piece of that conversation. We’ve talked a lot about that cash and cash management, whether you’re a. Is this a business owner or just, you know, Joe and Steve down the street? You got to manage your cash to earn income, but you also have to manage what your debt expense is. So if you haven’t looked at any of your floating debts, it’s always this is a good time to review them as we’re approaching kind of the peak if interest rates maybe do move lower. Now that refinance conversation can come back on the table. But now is the time when you can get the planning done on the debt side to evaluate where am I at. So if interest rates do move, you know, you might be ready to capitalize if there’s a little bit of a decline. So but again, cash management we talk about a lot. It’s a key piece of how you build asset allocations and interest rates. Make this a much more active conversation.

Jessica Gibbs, CFP® [00:29:42] Great. Dave?

David B. Armstrong, CFA [00:29:44] Yeah, I think this isn’t going to come off as a surprise to anybody, but from a very high level, everyone listening to this that is an investor in the equity markets has to remember that the S&P 500 averages on an entry year basis, right? So that means in the middle of every single calendar year, there is a drop of on average going back to 43 years. So that’s Nate. Oh, by the way, Nate just found out that he passed the CFA level one, so I’ll ask him to check my math on this. But that goes back to 1980, right? So 43 years of data. Am I good there, Nate?

Nate Tonsager, CIPM [00:30:17] Yea good job.

David B. Armstrong, CFA [00:30:18] Okay, perfect. So. So ever. So every single calendar year, going back 43 years, there is an average drop of 14.3% in the S&P 500. And so even though there’s an average drop of 14.3% every single calendar year, 32 of those 43 calendar years have yielded positive returns in the S&P 500 by December 31st. So when I go back to possibilities and probabilities, I just say like you have a high probability of getting positive returns every single year in the market if you stay in it for the long term with a good investment plan, even when there are 14.3% drops. So what do you do? Here comes the broken record. You hold cash as a short term hedge, again at 5% right now, by the way, daily. And don’t try that. Don’t try to time getting in and out of the market based on what you think will or won’t happen or what the news is saying or anything like that, that increases your chances of success. Just playing the probabilities. So that’s that’s my what to do with this info.

Jessica Gibbs, CFP® [00:31:18] Good context, as always. And you know, for those of you have been long time listeners, you know that in January we’ll release an episode where we’ll talk about Q4. But really we more look at kind of the whole year as a whole. And I think that also, I think you guys all have some interesting lessons to take away from 2023. So more to come on that.

David B. Armstrong, CFA [00:31:37] Yeah, but I suspect that will also review everybody, all the big research firms, what their predictions were for 2023. We’ll pull them all up and we’ll go over and we’ll see. We’ll see who who is right and who is wrong.

Jessica Gibbs, CFP® [00:31:50] So I know and well, as part of that, we can also review the three of you.

David B. Armstrong, CFA [00:31:55] We do it for fun.

Jessica Gibbs, CFP® [00:31:57] I see you guys. Don’t hold yourselves out there as trying to predict the future, but they are kind of fun to talk about and they are people who have been following along this year know that Nate, Erin and Dave did make some predictions earlier in the year in Q1 and Q2. I thought it would be fun to for each of you to kind of just remind the listener, what was your prediction and maybe do a little like check in as far as like how you’re feeling about your prediction if you’re still holding out your self confidence in yourself or maybe if your thinking might have changed between now and the end of the year? I think I think what’s the it’s it’s a sandwich, right? Lunch from somewhere.

David B. Armstrong, CFA [00:32:37] Yeah. Yeah.

Nate Tonsager, CIPM [00:32:38] So I can kick it off. So my prediction in Q1 and the podcast was that the Fed would not cut rates in 2023. And theme we have here at the monument important is don’t cut your winners and right now that’s looking pretty good winner with the Fed saying that they’re going to hike one more time. If you look kind of at the bond markets, the probability they’re pricing in a hike is lower than that. It’s at 38% roughly, but there’s no cuts in the next two meetings that are being priced in or discussed. And so that is a Jimmy John’s sandwich that I think Erin may owe me in 2024 around that. I still do feel good about it. And kind of my whole theme of the podcast has been I do think it’s kind of the right action for the Fed to remain data dependent. They’ve shown the ability to pause as I don’t know if they want to use that word, but I’m going to use it to be judicious and not just hike us into a recession. That is possible. And that kind of remains the big elephant in the room. But at least for 2023, the Fed seems on pace to not cut rates.

Jessica Gibbs, CFP® [00:33:38] All right, Nate, sticking with his prediction. So, Erin, how about you?

Erin Hay, CFA [00:33:41] Looks like mine was S&P would be up 10% in the second half. Not looking good so far, down three and a half percent. But I am going to continue to put my put my confidence in that prediction. So I’m going it I’m going to hold the line there. And in fact, I’m going to double down. I’m going to say there’s there’s a 40% chance that we actually get 20% in the second half of 2023. So better than that, of course, through the through the end of the year, given what we did in the third quarter. I reason I said 40% on this, I just kind of thought of this and I wanted to read this tweet to you guys. This is I don’t know where this is from, from someplace on Twitter, but the title of this blurb is How to Get Attention. And think about this. The next time you’re reading someone, you know, give up a spot or a probability on TV or in the news. Mm hmm. If you want to get famous for making big non consensus calls like I just made here without the danger of looking like a muppet, you should adopt the, quote, 40% rule. Basically, you can forecast whatever you want with a probability of 40%. Greece to quit the euro. Maybe Trump to fire Powell and hire his daughter as the new Fed chair. Never say never. 40% means the odds will be greater than anyone else’s saying, which is why your clients need to listen to your warning. But also they shouldn’t be too surprised if you know the extreme event doesn’t actually happen. So there you go. I say 40%. Yeah, we’re going to end second half of 20, 23, up 20%.

Jessica Gibbs, CFP® [00:35:12] Nice. Nice.

David B. Armstrong, CFA [00:35:13] Okay. I have a 40% chance that both Erin and Nate of. Right. How’s that? So so my my prediction in Q1 was that the S&P 500 would be up 15% for 2023. And then in Q2, I had the prediction that the Fed was at its target rate of 2% on inflation, and we’ve seen the last of rate hikes. So I think my quote was we have seen the last rate hikes. Okay, So maybe I’m right there with an asterisk because what I didn’t say was we have seen the last rate hike, right? We have seen the last of rate hikes. That could mean like one or two, you know. So anyway, I’m going to say like asterisk there, because I was I was in the ballpark. I was in I was in the ballpark there. Right. But the S&P 500 up to, you know, 20 in 2023, up 15%. You know, the S&P 500 finished up a positive, 13.1% in Q3 after a 3.3% sell off. And that’s going in to what’s historically one of the better months of the year, which is October, not so far, but historically it is. It’s also historically one of the best quarters of the year, the fourth quarter. And it’s also this presidential cycle, presidential election cycle, which has some, you know, historical probability of of being a good time, too. So I think Erin could actually end up being right on his prediction. I think I’m going to stick with my prediction of up 15%. So and I also still think the Fed is probably done and maybe even behind lowering that’s referenced my deflation commentary. So I’m sticking with my stuff.

Jessica Gibbs, CFP® [00:36:50] There you go.

Nate Tonsager, CIPM [00:36:51] I think you definitely get an asterisk. So, you know, it’s not it. We always talk about, you know, not to call.

David B. Armstrong, CFA [00:36:55] Top of the pandemic apart. It’s asterisk. It’s an asterisk. It’s like, I don’t know. And it’s all for fun. What what would happen? What would happen if I’m on a par three on the golf course and I hit one into the water. So I tee off again and I hit a hole in one. Did I get a hole in one? Not technically, but asterisk. I’d still take the flag and have to buy everybody drinks, you know, So you know the whole question.

Jessica Gibbs, CFP® [00:37:17] We’ll stick around and see who wins and which so great and really high stakes at Monument. Well, thank you guys, as always, for your insights. And yeah, as I said, we’ll be back in January to do a full recap of 2023 what’s happened in the markets. And and yeah, I’m hoping that you guys are right and that Q4 is is a really strong finish to the year.

David B. Armstrong, CFA [00:37:38] Yeah. And if we’re wrong, you know hey, everybody had 12 to 18 months of cash, right? So there you go. There you go.

Jessica Gibbs, CFP® [00:37:45] All right. Thanks, guys. All right.

David B. Armstrong, CFA [00:37:46] Thanks. All right.

About "Off The Wall"

OFF THE WALL is a podcast for business professionals and high-net-worth investors who want to build wealth with purpose. A little bit Wall Street, a little bit off-the-wall; it’s your go-to for straightforward, unfiltered wealth advice on topics that founders, business owners, and executives care about.

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