Third Quarter 2023 Review & Outlook

“Generally speaking, the market rallies whether there’s a recession or not after inflation peaks.”

 – Brett Nelson, Head of Tactical Asset Allocation at Goldman Sachs Group


The economy and stock market have confounded economists and market forecasters in 2023.  Entering 2023, the economy faced high inflation, rising interest rates, a general negative tone towards the stock market after poor market returns in 2022, and an inverted yield curve that had many forecasters expecting a recession by the end of this year.  However, the economy has grown at a stronger pace than expected despite the rapid rise in interest rates.  Gross Domestic Product (GDP), the main measure of economic health in the US, has grown by around 2% during the first two quarters with the Atlanta Fed now forecasting a robust 4.9% growth for the third quarter.  Most economists don’t expect GDP to be quite that high for the third quarter, but to still finish around 3.5% for the quarter.

The S&P 500 reached its recent 2023 high at the end of July, just before entering on average the toughest two-month stretch of the year for the stock market. For the third quarter, the Dow Jones Industrial was down (2.62%), the S&P 500 was down (3.65%), the Nasdaq was down (4.12%), and the Russell 2000, a measure of small cap stocks, was down (5.49%).  But even with the declines in the third quarter, investors have been rewarded this year with the S&P 500 up over 13% and the NASDAQ Composite up over 35% for the first nine months of the year. The three strongest sectors during the third quarter were Energy, Communication Services and Financials.  The weakest sectors were Utilities, Real Estate, and Consumer Staples.      

Outside of the mega-cap stocks in the S&P 500, most notably the so called Magnificent Seven stocks (Apple, Alphabet, Meta, Amazon, Microsoft, NVIDIA, and Tesla), it has been a ho-hum year for the stock market.  The median stock in the S&P 500 is up just 0.4% this year.  The top 10 stocks by market capitalization are up an average of 69.6% for the first nine months of the year while the rest of the stocks in the S&P 500 are up an average of 1.73%, according to Bespoke Investment Group. 

Government bond yields, which move inversely to bond prices, started increasing again in July when many economic reports posted stronger results than expected.  Treasury bond prices were weaker during the quarter with the 10-year yield increasing by nearly 0.90% for the quarter to close at 4.58%.  West Texas Intermediate Crude Oil was up 28% during the quarter as well.  Both of these factors negatively weighed on the results for the stock market. Other factors pressuring the stock market over the past several months include the United Auto Workers strike, the impending restart of student loan repayments, rising consumer debt, and a continually strengthening dollar.  The U.S. economy and employment picture continue to be stronger than the Federal Reserve desires, which increases the likelihood the Fed may raise rates again this year and delay anticipated rate cuts until later next year.  Most market forecasters anticipate the Federal Reserve continuing to talk “tough” about future interest rate increases but holding off on actually increasing rates.


Household spending is the main driver of the domestic economy with the consumer accounting for about 70% of the U.S. Gross Domestic Product.  Americans continue to spend robustly with spending increasing 5.8% in August compared to the same period 12 months ago.  Consumers continue to spend money on experiences such as travel, with Delta Air Lines reporting record revenue in the second quarter.  Also, Ticketmaster sold over 295 million event tickets in the first six months of this year which was up 18% over the same time period in 2022.  There is no doubt many of those tickets were sold at high prices to see Taylor Swift at one of her concerts.    

The Commerce Department reported at the end of September that the Personal Consumption Expenditure Index (PCE), which is the Federal Reserve’s preferred inflation measure, rose 0.4% in August which resulted in a gain of 3.5% over the last 12 months.  More promising is that during the last 3 months, core prices have risen at just a 2.2% annualized rate.  While inflation has continued to moderate from its highs, a concern now is inflation may trend higher due to the recent rise in energy costs over the last several months.  According to the Energy Information Administration, a gallon of regular gasoline averaged $3.84 in August, still down from a year earlier, but up from last December’s $3.21 per gallon. 

Housing inventory remains tight as many individuals have decided not to move from their existing home due to their extremely low mortgage rate compared to what they would have to pay in the current market.  According to the Bureau of Economic Analysis (BEA), the average rate on all outstanding residential mortgages stands at 3.60%, which is less than half the current national average 30-year fixed mortgage rate of 7.65%.  The spread between the two has not been wider in more than 40 years and creates little incentive for homeowners to move. 

The future direction of interest rates has a big impact on upcoming market returns.  Barron’s recently summarized this by stating, “As has been the case for the past few years, the Fed’s actions – or lack thereof – will heavily influence investors’ behavior.  Fed Chair Jerome Powell is loath to repeat the monetary-policy mistakes of the 1970s, when Fed officials gave up their inflation fight too quickly, allowing price growth to reaccelerate.  Today’s fed-funds target range of 5.25% to 5.50% is far below that historic peak.  However, it is far above the near-zero rates that prevailed through much of the Covid pandemic.  Wall Street continues to state that rates are likely to stay “higher for longer” as the Fed maintains its vigilance.”

Recently, Goldman Sachs reduced its odds of a recession.  Jan Hatzius, Goldman Sachs chief economist, noted “The continued positive inflation and labor market news has led us to cut our estimated 12-month US recession probability further to 15% from 20% prior.  We view Chair (Jay) Powell’s promise at Jackson Hole to proceed carefully as a signal that the hurdle for a November hike is significant.”  Another notable economist and investment strategist, Ed Yardeni, president of Yardeni Research, recently noted “We’re going to have a pretty good economy going into next year.  The stock market is already looking into 2024 and discounting a better year, with less hysteria over an imminent recession.  With continued disinflation, the Fed’s next move (for interest rates) might very well be lower.” 

Here are some notable positive potential factors for the fourth quarter of this year and for next year:

  • CFRA expects earnings per share for the S&P 500 to increase 8.2% in the fourth quarter of this year and 11.9% for all of 2024. This would come after an expected 1.0% decline for third quarter earnings, which would be the fourth consecutive quarterly earnings decline.
  • Since many global central banks have likely ended their rate-tightening programs, many investors anticipate the Federal Reserve ending interest rate increases by the end of this year.
  • The fourth quarter of the year has been the best three-month period of the year for stocks over the last 10 years.  According to CFRA, the S&P 500 gained an average of 5.0% during the fourth quarter of all years since 1990, rising in price 82% of the time.  And during the fourth quarter of pre-election years, the results were even more impressive with the S&P 500 gaining an average of 7.7% and rising in price 88% of the time. 
  • Only 28% of the respondents in the America Association of Individual Investors recent sentiment survey described themselves as bullish.  A good contrarian indicator is to be bullish on the market when others are bearish. 
  • As we noted in our quote at the beginning of this report, history suggests the market could have more gains ahead even if the economy slows down.  The S&P 500 has increased 13% since a July 2022 report showing the U.S. inflation rate hit a four-decade high of 9.1%.  Since 1945, the S&P 500 has risen 21% on average in the two years after the release of data showing a peak in consumer price inflation, according to Brett Nelson from Goldman Sachs. 

The real tug of war during the fourth quarter will likely be whether or not longer-term interest rates continue to climb, moderate, or decrease.  Due to many of the positive factors noted above we continue to remain positive on the market moving forward.  Please let us know if you have any questions or if you would like to discuss your financial situation in detail.  Thank you for being clients of our firm.


Marietta Wealth Management, LLC

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