facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause Share Arrow Right

Q3 2023 Quarterly Market Update

Market Update Q3 2023

Hello everyone. Thank you for watching the Rise Advisors frameworks update and market outlook for October, 2023. My name is Zach Harrington, Partner, Financial Advisor, and Chief Investment Officer here at Rise Advisors. On behalf of my partners Mark Jones, Stephanie Kelm, Scott Klatt, as well as our staff, I want to thank you for being clients of Rise Advisors and taking the time to watch the market update for October of 2023. We're going to spend some time today looking through and discussing what was our update from July that we sent out where we discussed some of the concerns we had about the US consumers, as well as some of the recessionary pressure. We're going to spend some time talking through the labor market, credit markets, what I call Fed hike to Fed cut. Basically, how long does the Fed normally take to cut rates once it's done its last rate hike. We’re going to look at some interesting consumer services, slow down data, which tends to be a really good indication of some affluent consumers and consumer spending.

Some interesting data around what we're calling the S&P 493, and you'll see why we use that term very exclusively. And then we're going to talk through framework portfolio composition. We're going to talk about the case and reasoning for some high-quality mortgage exposure within the portfolio. We're going to talk about the reduction of dimensional core fixed income ETF in the portfolio, the addition of Janice Henderson's mortgage-backed security fund here in the coming weeks. We're going to talk through the structured notes that we purchased throughout the summertime, which have done a really great job as markets have pulled back pretty dramatically off their highs they hit in July. And then just some year-end rebalanced data.

 So, starting with the labor market, the labor market is a really important piece of data to look at. There are different types of labor data that comes out on a regular basis. The one I think you should focus on is non-farm payroll. What this data really shows us is how jobs are being added to the economy that basically exclude farm jobs. This is really important information because this is a really great indicator of how businesses are looking at the future, economic either certainty or uncertainty here in the U.S. So what you can see is back at the start of 2022 and the Fed began its rate hiking cycle, we had a really robust labor market and as rate hikes really picked up throughout the end of 2022 and 2023, you'll see that right around June mid-year, the labor market started to bottom a little bit, but it's had a pretty unprecedented rebound here. The estimate for September of 2023 from Dow Jones was 170,000. It came in at almost doubled that. So, the labor market's really important because as the labor market weakens, it gives case and gives reason for basically the Fed to start to pivot.

So, when we look at basically what we expect to happen within specifically credit markets once the labor market finally softens, what we're looking at here is some data from Apollo. And what it shows here is basically the economy slowing because of fed rate hikes. We've had that happen here. Credit spreads will start to open up, which is pretty normal behavior as we head into a recession. And that should correspond as these non-farm payrolls start to go below a hundred thousand people getting new payroll jobs in a given month. As that happens, it creates a really tough decision for the Federal Reserve because if inflation is still above 2% where it is today, the Fed has to make an acknowledgement that a soft landing is unlikely. Because as the labor market weakens, it's a sign that both consumers will continue to weaken and that companies have negative outlook on where things head in the future. And so, it's going to force inflation lower as we enter a recession and inevitably the Fed can then begin to cut rates. But we feel that a soft landing is really unlikely at this point, even with the surprise numbers in September.

One of the questions we get a lot of, and I think that Apollo did a great job with this chart, is looking at some of the rate hiking cycles that we've experienced throughout US history. So, this goes back just about 50 years and it's taking a look at basically what is the average from the last Fed hike to the first Fed cut. And that average is about eight months. So, if we look at where things stand traditionally, you know, a vast majority of those well below the eight-month timeframe, some of those were really quick, um, turnarounds because recessions were hitting. And so if we look at it right now, the Fed last hiked rates in July of 2023. So we sit here in October, eight-months from now from July, would put us at about March of 2024, where if economic data comes in light for what was the third quarter and we have a soft fourth quarter that would put us into recession territory, it would make logical sense that if July was our last cut or last hike, excuse me, we would have a March, 2024 cut.

So that's kind of our base case in our thoughts. And we talked about this a lot in our last quarterly update and what I think is really important is to follow up on what is, you know, some weakening consumer behavior and there's some interesting, somewhat anecdotal evidence, but it tends to be a really good indicator. There are ways that you can see consumer services and the consumer services were what have kept the economy out of recession as the Fed has hiked rates. As consumers are out going to movies, going to Broadway shows, going to sporting events, going on trips, consumer appetite for these has been pretty strong and you can see it here over the last number of years, kind of what things have looked like seasonally. If we look at the last, you know, six-to-eight-months or so where things are here in the US you can see it's been a pretty rapid decline and normally the fall tends to be a pretty strong season and it doesn't look like that's going to be the case here as consumers start to wonder about job security, inflation, cash on hand, things like that. Same thing when you look at movie theater attendance. So this is a really sharp decline. Midway through the year you had some pretty strong box office numbers. Now a lot of times people look at this and say that's the Barbie and Oppenheimer effect and things like that, but this, this decline is pretty unprecedented. And when you look at movie theater attendance, and a lot of that is just people choosing to stay in, you're paying for these subscription services, you're paying for a lot of other expenses, money's getting tighter. It's just an interesting anecdote around some weakening consumer numbers.

 This part I think is really interesting and what this is here is we're calling it the S&P 493, but what's really important is that seven companies in the S&P 500 are up more than 50% year to date. Those seven companies are also the seven largest companies in the S&P 500. You're looking at Apple, Microsoft, Amazon, Nvidia, Google, Tesla, and Berkshire Hathaway. So those seven companies are up more than 50% year to date. And this is looking at the performance going back to January. The other 493 companies in the S&P 500 are basically flat for the year. So, when you look at the performance of the S&P 500, when you look at CNBC and it says, you know, S&P 500 up X percent year-to-date, that's being driven by seven companies, that doesn't tend to be a good sign of the economy. What that's showing us now is that some of these companies have gotten so large that they're kind of becoming their own independent markets and a lot of these smaller companies are having a hard time right now. Whether it's supply chain issues, whether it's tightening margins as costs continue to be high and they can't keep passing the price increases onto consumers. There's a lot of weakness in basically everybody that isn't, once again, Apple, Microsoft, Amazon, Nvidia, Google, Tesla, and Berkshire Hathaway.

 With that in mind, we talked about it a little bit during the July update, kind of things that we're doing to get ahead of what we believe to be a really soft fourth quarter and a really soft start to the year as we think, you know, a recession is really likely. We bought those structured notes and we'll talk a little bit more about that, but I think there's a real case in the portfolio for high quality mortgages. High quality mortgages as an investment are known as what are called mortgage-backed securities. It's a bond investment that basically is just a basket or a pool of mortgages.

 I really want to focus on specifically investment grade mortgage-backed securities. These are really high-quality mortgages that have been lent to really high-quality borrowers and basically the risk of them not being paid is super low. Investment grade mortgage-backed securities you already own. And for those of you who are familiar with the aggregate bond index, it makes up just about a third of the bond index. They're really great investments in recessionary times that being mortgage-backed securities. And that's because an investment grade mortgage-backed security is comprised of what are known as agency bonds, which have two layers of protection. They're securitized by the value of the home. So, if you live in a $400,000 home and you owe $300,000 in your mortgage, the bank could repossess the home and still be able to sell it to back up the outstanding debt. The other piece is that they're also securitized by the federal government. A lot of these are what are called FHA loans. So that two layers of securitization makes them a really great investment during recessionary times. What you're looking at here is basically mortgage-backed securities versus the aggregate bond index versus investment grade corporates. Number one represents the aggregate bond index. Number two represents mortgage-backed securities. And Number three represents the investment grade corporate bond index.

And what we're looking at here is 2008, so from January 1st of basically 2008 through the end of the year. Now for those of you who were investors at that point and paid attention to markets, you basically had any sort of investment grade bond investment did okay except for corporates, rightfully so. It was an unprecedented global financial crisis, and a lot of companies were concerned about whether or not they were going to be able to pay their debt. But the treasury side of things and the mortgage-backed security side of things perform really well. So if you owned the aggregate bond index in 2008, you were up about 5.24%, but a big part of that was the drag down of corporates, which also make up about a third of that index.

If you parsed out just the mortgage-backed securities, they were up 8.34% during that period. And that's because of the two layers of securitization. So even in the event of these houses going under and home prices coming down, there's still that backstop of the federal government. When we look at it over the whole period of the global financial crisis, so starting in 2007 going all the way through basically 2010, what you're looking at here is the same thing. If you had gone out and bought the aggregate bond index, you would've been up about 27% or 6.15% per year over the time period. If you bought mortgage-backed securities, you were up 29% and some change, or 6.6% annually. And if you bought the corporate bonds, you were up 6.47%. So, what this shows you is in times of economic uncertainty, one of the best places you can be because of those two layers of securitization are mortgage bonds.

 When we look at what's going to happen in the portfolio here as we come into year end, I want to reiterate that the structured notes that we purchased in July have performed really, really well. Markets have basically hit highs at the end of July, 2023, and they've corrected pretty abruptly here over the last two or three months. When we bought the structured notes, it was really good timing. Markets were at basically their highs for the year, and we were able to lock in some of those gains and put some of those buffers in place that just help kind of smooth out some of the volatility. We're really happy with how those panned out.

You are going to see a reduction of dimensional core fixed income, and that's designed to make room for those mortgage-backed security positions. We are going to be using the ticker symbol JMBS to get your mortgage-backed security exposure that stands for Janice Henderson's mortgage-backed security ETF. It's a best of class mutual fund in ETF, all investment grade mortgages and has better performance and less volatility and recessionary environments. We're very happy to add that fund and it's just another layer of protection as we look to try and reduce your volatility here. Going into what we think is going to be a choppy time. So as far as year-end trading and rebalancing, you're going to have the mortgage-backed security trading take place. Also, for anybody who has a taxable account, we're going to explore tax loss options before year-end and then we're also going to end up doing an overall rebalance to basically get everything to target in November so we can go into 2024 with everything allocated how we want it to be.

I want to thank you for taking the time to watch this video. This is the conclusion of our quarterly market update for October, 2023. It's crazy how fast this year has gone by, but as always, we appreciate your support, we appreciate your trust, and as I always say on these videos, if you have any questions relative to your accounts, relative to the decisions that we're making within the frameworks, portfolios, or any other thing when it comes to Rise Advisors or the management of your accounts, feel free to reach out to your advisor. Feel free to reach out to me. I'd be more than happy to discuss these changes with you. I hope you have a wonderful and safe holiday season and I look forward to catching up with you in January for our market update then. Thank you.

 Disclosure: This presentation is for Informational purposes only. All investment strategies including rebalancing and diversified asset allocation have risk. Past performance of our investment approach, component holdings and methods does not guarantee future results. Advisory services offered through Rise Advisors, LLC ("Rise") Registered Investment Advisor. While all data is believed to be from reliable sources, accuracy and completeness are not guaranteed.








7.Bloomberg Terminal: Compare LBUSTRUU LMUSTRUU LUACTTRUU CY2008

8.Bloomberg Terminal: Compare LBUSTRUU LMUSTRUU LUACTTRUU CY2007/2008/2009