Welcome to our October 2023 Viewpoints, a monthly bulletin from PDS Planning to our valued clients and friends. Our goal with each issue of Viewpoints is to provide you with a wide variety of perspectives on life and wealth. Feel free to share with others.
Lackluster 3rd Quarter
Across the board, all but two asset classes were down in the 3rd quarter. Commodities and cash were king, but only barely. Although there was no place to hide those three months, year to date returns are still doing okay – some up, some down. Which is what we’d expect to see and why investing in a diversified portfolio can be important!
Quick Update on Inflation
The most recent reading of the Consumer Price Index was higher than expected, but the next 12 months could see continual easing, especially in the shelter category. For a more detailed look, read our latest market commentary.
Speaking of Diversification
Diversification talks a big game, but can it back it up? Let’s look at developed country returns over the last 10 years and compare to the previous 10 years to help answer it. Where the S&P 500 is representative of the United States, the implied dominance the index has had isn’t the far and away winner some may think. The column on the far rights is the annualized return from 2013 to 2023 and the column on the far left is the annualized return from 2003 to 2013. Each country has their ups and their downs, but that’s exactly the point. We can’t consistently correctly predict any country will fair better or worse than another any given year, which lends to the argument investor’s should consider owning bits and pieces of all of them to take advantage of the up years when others are down.
The Impact of Rates on Aggregate Bond
Interest rates and bond prices have an inverse relationship. When rates go up, bond prices go down, with the opposite being true as well. So as the Fed has hiked interest rates with breakneck speed to try and counter inflation, bond prices have fallen. The chart below is a look at the US Aggregate bond index as of September with forward charting estimates based on potential rate changes. Based on current duration and yield, if rates increase 1.0%, we can expect the yield to return 5.4% (current) while experiencing a negative price return of -6.2%. The middle hypothetical shows a 5.4% 1-year return, all earned from the yield. Should rates fall by 1.0%, investors would expect to earn the yield return of 5.4% along with the positive price return of 6.2% for a total 1-year return of 11.6%.
Careful Who you Root For
What do the years 1929, 1930, 1980, and 2008 have in common? There was a financial crisis AND the Philadelphia Phillies won the world series. Yup, numbers don’t lie – if the Phillies win a world series, a recession follows. And this year could be the year for the Fighting Phils. They’ve looked nearly unbeatable these playoffs and are now 2 games away from reaching the World Series. Of course these two events are unrelated; correlation does not equal causation. Leading indicators are still pointing towards a recession at some point, so maybe it’s best to cheer on the Diamondbacks or the Rangers this year because, like Michael Scott from The Office says, “I’m not superstitious, but I am a little sticious.”
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