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October 2023 Monthly Review

"Markets Are Like A Box Of Chocolates"

By Loyd Johnson, Chief Investment Officer
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Loyd Johnson PhotoA Look Back

Of course, the correct line was, “Life was like a box of chocolates…” from the 1994 smash hit, "Forrest Gump." The movie won six Academy Awards, grossed over $670 million, while the soundtrack sold over 12 million copies…and there were several other lines about life that probably parallel financial markets. However, as I caught a few minutes of this classic recently, it is this line that I thought timely concerning current markets. Seldom in the investment management business is it the case that if you knew a particular economic release or report that you have certainty in knowing how markets are going to react…in the short or longer-term. Sometimes, good economic news is good for the stock or bond markets, and sometimes it is just the opposite. It’s like the box of chocolates: you can’t be exactly sure what is inside. Recently, better-than-expected economic news (better jobs reports, higher retail sales, higher GDP, etc.) could lead to investors and traders taking the opposite view in the financial markets. It might go something like this: hotter economy => higher interest rates => higher corporate borrowing costs => lower investment in future growth =>greater odds of recession => stock prices head lower. It is not surprising that many veteran economists and market professionals can look at the same numbers and come up with different interpretations of what that might mean for different areas of the markets. It is also another reminder of why we believe it is so important to be consistent and patient in your investment approach, and to lean into those things that have worked over time. Have a diversified asset class mix…Don’t be afraid of the stock/sector/asset class that has underperformed. Underperformance leads to outperformance and vice versa. In the month of October, the negative market sentiment prevalent since July continued on. Large-Cap domestic stocks were down over 2%, while Small-Cap and International stocks were significantly more negative. After posting a 21% return by the end of July, the S&P 500 gave up half, or over 10%, of its YTD performance by the end of October. Core bonds continued to disappoint in the month as the Bloomberg Aggregate Index was 1.58% to the bad, and is now -2.77% so far in 2023.

A Look Ahead

The first week of trading in November could be an advertisement on why it is so important to be/stay invested, as stock and bond markets delivered a quarter’s worth of performance in the week. Why? The biggest driver has been the Fed commentary and some economic data that has spurred a decline in overall interest rates. Lower rates mean higher prices in bond-land and also has the potential to make stocks more attractive. Stocks were up over 5% and bonds 2% over five trading days, marking the best week of performance in 2023. Long-time readers know that, in general, we are a glass half-full kind of team. We believe in the resiliency of our markets and beauty of the economic system. It does not, however, mean that the pendulum can swing too far at times. If you really think about it, the only way that you get bubbles or panics is when investors go to extremes and are either too optimistic or pessimistic given the underlying circumstances…and that typically is what creates opportunity, and when that steady, consistent hand is most needed. We continue to believe that bonds will have a healthy risk-adjusted return over the next several years and remain overweight to cash. November 9th marks my dad’s 88th birthday, and he has always told me… “It’s easy when it’s easy. You make your hay when things get tough.” I think that works in life and the markets...