Cayside Review: 2023 Q3
Our quarterly newsletter including 3rd quarter review, global market update and outlook, key numbers, and announcements .
Q3 2023 Review & Outlook
US Equity Markets retreated in the third quarter of 2023 with a -3.2% return (S&P 500) and -2.1% (Dow Jones Industrial Average). Technology companies fell with the Nasdaq Composite down -2.9% in the third quarter.
As the quarter came to an end, investors witnessed increased volatility in global financial and credit markets. With equity markets now reversing their prior nine months of strong positive returns, it is essential to remember that market fluctuations are a natural part of investing, and they often provide opportunities for prudent and long-term investors.
What’s Driving Volatility?
Interest Rate Speculation: Indications of further interest rate hikes by central banks have led to investor unease. Higher rates can impact borrowing costs and the valuation of assets along with tightening borrowing terms for businesses and consumers. Jamie Dimon, CEO of J.P. Morgan Chase, recently warned that many businesses and investors were underprepared for a worst-case scenario in which interest rates hit 7% or more with a growing risk of stagflation.
Inflation Worries: Rising inflation rates have raised concerns about purchasing power and the potential impact on corporate profits and threat of rising unemployment. The price of Crude Oil increased nearly 30% in the quarter creating further constraint on consumers and businesses.
Low Breadth of Equity Gains: The robust YTD gains in the large-cap benchmarks are being driven in part by a small group of mega-cap companies. The “Magnificent 7”, as they have come to be known, have a 43% and 27% weighting in the Nasdaq 100 and S&P 500 indices, respectively, and the Bloomberg “Magnificent 7” Total Return Index is +84% YTD. The S&P 500 has gained 13.1% this year, while the S&P 500 equal weight index is only up +1.8% this year further illustrating the impact of these seven stocks on the overall market.
As shown above, we have seen significant increases in interest rates, oil prices, and a strengthening US Dollar this year.
Important Considerations
Credit and Rate Environment: Portfolio and Economic Impact
The third quarter of 2023 was defined by the persistent upward trajectory of interest rates, a trend that has been closely watched by investors, economists, and policymakers alike. The anticipation of future rate hikes has driven yields higher across the fixed income spectrum.
The increase in interest rates has broader implications for the economy:
Consumer Borrowing: Higher interest rates translate into increased borrowing costs for consumers. Mortgage rates, auto loans, and credit card interest rates have all seen upward pressure, potentially impacting household budgets and consumer spending.
Business Investment: Rising rates can influence business investment decisions, as the cost of financing projects and expansions increases. Companies may become more selective in their capital allocation, which could signifanctly slow down economic growth.
Housing Market: The real estate market has been particularly sensitive to rising rates, with higher mortgage rates cooling demand for housing and reducing transactions.
The default rate for US leveraged loans has been rising from a low of just a few basis points in early 2022 to roughly 2%, a level that remains in line with the 10-year average.
The combination of an inverted US Treasury yield curve along with borrowing costs and default rates ticking up warrants increased caution in the future. At some point, balance sheets may become unsustainable and may have to be adjusted, through actual defaults or reorganizations which will signal a more recessionary environment.
3rd Quarter Investment Activity
Overall, we remain highly selective in US equity markets with a preference for high-quality businesses in both growth and value sectors. We are highly focused on businesses with strong pricing power and operational efficiency to protect against inflation and consumer weakness. During the quarter, volatility and pricing dislocations in certain sectors such as technology, real estate, and utilities have provided some opportunities with attractive companies that have been oversold.
In Fixed Income, we remain focused on liquidity and minimizing exposure to credit and duration risk with a preference for short-duration U.S. Treasury Bills.
Real Estate, Private Equity and Venture Capital
We utilize our network of investment professionals and clients to source and research interesting opportunities in the private market. We worked to close on a property in Sebastian, FL that will be developed into a Boat and RV storage facility. We see this as an opportunity to provide our clients with a great development operator, yield potential and ownership of land in a growing area of Florida.
We continue to seek opportunities in real estate, primarily in agriculture and raw land, as we anticipate increased inventory and a more opportunistic period for strategic buyers with liquidity. We believe real estate is a core holding for long-term investors and being prepared to take advantage of buying opportunities during this stage of the cycle is an important consideration.
Business Updates and Personnel News
New Hire: Operations Analyst – Ali Cole joined us in the 3rd Quarter bringing a strong background in legal and operational knowledge. Welcome Ali!
We continue to grow our business and look to constantly improve our offering of services to our clients. We look forward to continuing our relationship with our internal and external partners as we expand our network of clients, staff, and service providers. If there is an individual or entity that you believe Cayside Partners can assist, we welcome the opportunity to expand our network. Please feel free to connect us and as always, we appreciate your support and confidence in us!
Contact Us
Please do not hesitate to reach out to us with questions or comments. You can reach us directly here.
Disclosures:
Cayside Partners, LLC ("Cayside") makes no warranty as to the accuracy or completeness of any data herein. Information presented in this report is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Past performance is not indicative of future results. This report is intended for the recipient(s) only and not for further distribution without written consent.