Following a robust rally for stocks in the first half of 2023, the third quarter offered something of a reality check. Global Equities continued, its downward trend in September, as the Fed’s “higher for longer” theme started to sink in, with equities readjusting to the new perceived environment. The S&P 500 posted its second month of broad declines (-4.87% (USD) in September and -1.77% (USD) in August) after five consecutive months of gains. the Dow Jones Industrial Average fell 3.4% (USD) and the Nasdaq ended 5.8% (USD) lower. Around the world, Emerging Markets were down 2.6% (USD), and EAFE sank 3.4%(USD). September’s declines dragged equities into the red for Q3. The Dow posted a 2.1% (USD) decline in Q3, the S&P 500 ended the quarter down 3.3% (USD), and the NASDAQ 3.9% (USD) finished lower. For the second straight month, Energy was the only US stock sector to post a positive return. Real Estate was the top laggard in September, tumbling 7.2% (USD). A sell-off in global bond markets was partly to blame for the pressure on risk assets, with the global aggregate bond benchmark falling by -3.6% (USD) in the third quarter. It transpired that some of the optimism that drove the first-half rally was misplaced, particularly expectations that the Federal Reserve would soon be pivoting to lowering rates. In the bond market, yields rose to their highest levels since 2007, and U.S. Treasury bonds suffered. Corporate bonds stayed afloat, and riskier high-yield areas of the bond market performed best.
For much of the rally, the very largest tech stocks—including Apple, Microsoft, Alphabet GOOGL, Amazon.com AMZN, and Nvidia—were driving the vast majority of the market’s returns. Through May, those five stocks alone contributed to 78% of the entire U.S. market’s gain, a hyper-concentration well above the long-term average contribution of 5% for the largest stocks. The same stocks that kicked off what many called a new bull market were the ones that subsequently took the market lower. Apple, Microsoft, and Nvidia were the leading detractors from 1 Aug through the end of the quarter, followed by Tesla and Meta Platforms.
On the economic front, YoY inflation rose for a second straight month, from 3.18% in July to 3.67% in August. Conversely, Core Inflation fell to 4.35% in August, marking the fifth consecutive monthly decline. The US Consumer Price Index logged a monthly increase of 0.63% in August, its most prominent in the last 14 months. US Personal Spending was up 0.45% MoM. The Federal Reserve kept the benchmark Target Federal Funds Rate unchanged at 5.50% during its recent September 20th meeting. August’s unemployment rate rose to 3.8%, three-tenths higher than July’s figure of 3.5%. However, the labor force participation rate grew by two-tenths to 62.8%. August nonfarm payroll data showed 187,000 jobs added, surpassing expectations of 170,000.
While the simultaneous fall in stocks and bonds over the third quarter will remind many investors of 2022, there were some important differences in the drivers behind these moves. Economic data over the quarter pointed to a deterioration in the growth outlook, with services activity starting to show signs of “catching down” to the already weak manufacturing sector. Coupled with a continued moderation in inflationary pressures, investors are increasingly confident that we are approaching a peak in the global hiking cycle.
Over the past 40 years, the median length of time between the last rate hike and the first cut is eight months, although the gap varies from just a single month in 1984, to 15 months after the last hike in 2006. The focus has therefore shifted from the level of peak rates to how long central banks will hold rates at restrictive levels, with “higher for longer” increasingly viewed as the necessary scenario to tame stubborn price pressures. Despite the resilience witnessed in economic activity year to date, recession risks remain elevated and not all parts of the market appear appropriately priced for such a scenario. The reset in fixed income yields suggests that core bonds should perform their job as a diversifier if weaker growth helps to break the back of inflationary pressures.
In the past month, the South African stock market experienced a decline, similar to global stock markets (FTSE/JSE Capped SWIX Index decreased by 2.9% month-over-month). This marked the second consecutive month of losses, erasing all the gains made so far this year, leaving the year-to-date performance at a slight negative of -0.2%. The drop in the Johannesburg Stock Exchange (JSE) was quite widespread, with various sectors being affected. However, mining stocks, which had a significant negative impact on the JSE’s performance in August, managed to make a small positive contribution in September. This was mainly due to stable industrial metal prices, despite ongoing concerns about China’s economic activity. Iron ore prices, for example, increased by 1.7% in US dollar terms during this period. Rising energy prices played a favorable role for companies like Sasol and coal miner Thungela, both of which saw significant gains of 11% and 23% month-over-month, respectively. Brent crude oil and coal prices surged by 10% in the same period. The South African economy grew by 1.6% YoY in 2Q23 – the strongest expansion since the 3Q22. South Africa’s August headline CPI rose for the first time in five months to 4.8% YoY – with fuel price increases being a major culprit.
All performance figures in ZAR unless otherwise stated.
Quote from Charlie Munger
While macroeconomic events and market fluctuations can be captivating, they are often distractions that divert investors from the true path to wealth. Staying invested in high-quality businesses through thick and thin, while ignoring short-term macro events, is a proven recipe for success.
The Iza Portfolios
The Iza Global Equity Fund declined by 2,06% (GBP) in September. While the Iza Global Balanced Fund declined by 1,46% (GBP) for the month. The Stable Model Portfolio declined by 0,72% (GBP) for the month.
During the past quarter, we have diligently observed the macroeconomic and market landscape to ensure that our strategic positioning remains well-suited for the long term. As previously communicated, over the last three months, we have made strategic adjustments to our portfolio’s to capitalize on prevailing short-term market fluctuations and further enhance our diversification. Our efforts have culminated in the successful integration of iShares Core MSCI World ETF, Nomura Global High Conviction Fund, and T.Rowe Global Focused Growth Equity into our portfolio’s. Additionally, we have prudently trimmed our holdings in Fundsmith and Scottish Mortgage to align with our risk tolerance and overall strategy. We maintain a vigilant stance on the macroeconomic dynamics affecting the fixed income and bond market. Presently, our outlook on bonds is optimistic, and we are closely monitoring developments in this space. Our commitment to robust communication with our esteemed fund managers persists, and we continue to engage in regular meetings to discuss prevailing market conditions and ensure alignment with their investment philosophies and strategies. In sum, our overarching strategy remains steadfast, grounded in the conviction that investing in high-quality businesses with robust competitive advantages, stellar management teams, and a focus on innovation and technological development is the prudent course. We are confident that our esteemed fund managers will deliver superior long-term performance, undeterred by the transient market turbulence witnessed on a global scale.
Funds’ Performance Summary
Over the past year, concerns about a recession have been growing due to a significant increase in interest rates and market instability. However, there has been a recent change in sentiment. With the U.S. economy displaying remarkable resilience, more and more investors are beginning to believe that there is a greater chance of a gentle economic slowdown. This would involve the Federal Reserve raising interest rates to tackle inflation without causing a full-blown recession. Nevertheless, there are still many who approach this cautiously. The following graphic illustrates economic predictions for the United States in 2024, as forecast by various experts across Wall Street, Main Street, and corporate leadership.
Source: Federal Reserve Bank of New York, Visual Capitalist, The Conference Board, Goldman Sachs Investment Research, Bank of America.