We entered 2023 in the midst of very restrictive monetary policy, a deeply inverted yield curve, significantly higher interest rates and the continued drying up of consumers’ post-academic excess savings

In this short question and answer session, our portfolio managers take on the questions that prospective clients ask us most often during the due diligence process. 

In the third quarter, the market seemed to grapple with a “higher for longer” interest rate environment. The benchmark 10-year Treasury rose significantly during the quarter (from 3.81% to 4.57%), causing unease for investors, and contributing to the market’s decline during the period.

During a conversation with portfolio managers Kevin O’Brien, CFA, Steve Labbe, CFA, and Jay Kish, CFA, CPA, these three experts shared their observations on several hot-button issues, including:

Much of the second quarter was dominated by all things artificial intelligence (AI), after a new
version of OpenAI’s chatbot, ChatGPT, was released in March. The sophistication and capabilities
of this version of so-called “generative AI” caused an uproar within the tech world and beyond.

The first quarter of 2023 was akin to a play with three distinct acts. However, unlike a traditional play in which the first act introduces a problem, the second act a complication, and a resolution in the final act, the problem in this saga (rapidly rising interest rates) pre-dates the beginning of the story. And in the end, the audience is left unsure of a resolution.  (Hey, we didn’t say it was a good play).

“This time is different.” As 2022 began, that sentiment seemed pervasive. With the S&P 500 trading
close to all-time highs, continuing to be led by mega-cap technology and growth stocks, despite rising interest rates and worrisome inflation readings, the time-tested rule that ultimately, the stock market is a discounting mechanism, was seemingly being ignored. However, as the year progressed and inflation continued to surge, reaching a 40-year+ high of 9.0% in June, this time proved, unequivocally, not to be different.

According to ESPN major league baseball (MLB) analyst, Doug Glanville, MLB instituted the
“warning track” in 1949. This came after a Brooklyn Dodgers outfielder named Pete Reiser repeatedly crashed into the outfield wall, and continually injured himself. For non-baseball fans: the warning track is a strip of material averaging 15 feet wide, which serves to warn outfielders intently focused on catching a fly ball that they are dangerously close to colliding into the wall.

We find ourselves questioning the maxim, “Good things come to those who wait.” After waiting years for interest rates to rise, thereby ushering in a value stock renaissance, “Be careful what you wish for.” is perhaps a more appropriate sentiment. Indeed, while interest rates continued to rise in the second quarter, and value stocks outperformed, this came in the midst of a stock market selloff, which saw the benchmark S&P 500 enter bear-market territory in June.

The new year started as we expected: inflation continuing to rise, the Federal Reserve getting increasingly hawkish, interest rates rising, and with a rotation out of growth stocks into value. However, in mid-January, the market’s attention turned to Russia’s building of troops on Ukraine’s border, and ultimately to Vladimir Putin’s and Russia’s invasion – the consequences of which are myriad.