At a glance
Diversified portfolios started 2023 strong, but the third quarter reflected concerns about the forward path. Consumer spending is resilient, thanks to a healthy domestic labor market, stimulus savings, ongoing business capital expenditures and pockets of global economic strength. Further, despite higher interest rates and compelling yields relative to recent history, investors continue to show enthusiasm for stocks despite a shallow recession in Germany and disappointing Chinese growth impulses.
Interest rates and inflationary pressures remain the dominant factors shaping the capital market landscape. The U.S. Federal Reserve (Fed) and other major central banks’ interest rate increases intend to thwart inflationary pressures that remain persistent and above central bank target levels. We imagine central banks acting as the personal trainer to their respective economies, continuously elevating the treadmill ramp height in the form of successive interest rate increases. As those ramps remain elevated or potentially move higher, the runner — the economy — will likely fatigue, and the extent of the runner’s slowdown may lead to more challenging conditions for diversified portfolios than what we have seen thus far in 2023.
We have emphasized a more balanced forward outlook for diversified portfolios, not wanting to get overly bearish due to still-strong consumer fundamentals but also respecting higher interest rates’ impact on the economic runner’s pace. Higher bond yields, which move in the opposite direction of bond prices, offer investors the chance to collect income as they await the consumer’s forward path. Our viewpoints that follow factor in global considerations across asset classes, but please do not hesitate to reach out to us with questions on topics we have not addressed that are important to you.
― Eric Freedman, Chief Investment Officer, U.S. Bank