The S&P 500 is up nearly 9% so far in 2023 (as of Oct. 25), but market sentiment is definitely more skittish as we head into the end of the year. A major upsetting factor: bond yields across the maturity spectrum started spiking in August, with the 10-year U.S. Treasury at levels not seen since 2007. Investors seem to have come to the realization that interest rates could stay higher for longer, even as U.S. inflation has started to subside.
As our investment team has been saying since the start of 2022, we are likely in a new market regime defined by inflation and interest rates at levels higher than in the past 10 years, more regionalized production and trade, and greater geopolitical risk, all with enduring impacts on the capital markets.
There are many structural reasons we are not heading into spiraling inflation and interest rates as in the 1970s/early 1980s. But we continue to believe that the days of zero or low interest rates are behind us. Recent developments mostly bolster the “higher for longer” premise, including the rise of U.S. organized labor, more re-shoring of production, trillions of expected infrastructure spending, and a rising U.S. budget deficit amid higher borrowing costs.
All this and more is discussed in our Q4 2023 Quarterly Commentary, as well as implications for portfolios.