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Tough Quarter for Stocks, with Bonds Facing Third Straight Annual Fall

Tough Quarter for Stocks, with Bonds Facing Third Straight Annual Fall
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2 min 35 sec
Highlights from the Global Markets in 3Q23

U.S. Equity: U.S. stock indices posted negative returns in 3Q. The S&P 500 Index declined 3.3% while the tech-heavy Nasdaq Composite dropped 3.9%. Year-to-date results remain positive with the Nasdaq (+27.1%) well ahead of the S&P 500 (+13.1%). Within the S&P 500, Utilities (-9.2%), Real Estate (-8.9%), and Technology (-5.6%) performed the worst in 3Q while Energy (+12.2%) and Communication Services (+3.1%) led sector returns. In small caps, value stocks (Russell 2000 Value: -3.0%) outperformed growth (Russell 2000 Growth: -7.3%). Growth and value posted similar returns in the large cap space, down 3.1% and 3.2%, respectively. Small cap stocks underperformed large (Russell 2000: -5.1%; Russell 1000: -3.2%). Index concentration continued to have a notable impact on returns in 3Q. The Magnificent Seven stocks helped (Alphabet: +9.3%; NVIDIA: +2.8%) and hurt (Apple: -11.6%; Microsoft: -7.1%; Tesla: -4.4%).

Global Equity: Global ex-U.S. equities (MSCI ACWI ex USA: -3.8%) fell in 3Q. The stronger U.S. dollar was a notable headwind (MSCI ACWI ex USA Local: -1.4%). Value (MSCI ACWI ex-USA Value: -0.1%) outperformed growth (MSCI ACWI ex-USA Growth Index: -7.3%) by a wide margin. Only Energy (+9.0%) posted a positive return, while Technology saw the biggest decline (-8.7%). Oil prices surged on supply cuts and falling reserves in the U.S. European equities (MSCI Europe ex-UK: -5.9%) fell though returns were mixed across countries. Japan (MSCI Japan: -1.6%) performed well in relative terms and even better in local terms (+1.6%).

Emerging Markets: Emerging markets (MSCI Emerging Markets: -2.9%) outperformed developed markets (MSCI EAFE: -4.1%). In Asia, major index constituents such as South Korea (-6.6%) and Taiwan (-7.4%) weighed on performance. Latin America (-4.7%) was the worst-performing region with Mexico (-6.5%) and Chile (-9.8%) falling sharply. Broadly, Energy (+6.3%) delivered the strongest performance, while Communications (-5.9%) and Technology (-6.8%) underperformed.

U.S. Fixed Income:  U.S. bond returns are on the path for a third consecutive year of negative returns. The Bloomberg US Aggregate Bond Index sank 3.2% in 3Q and is down 1.2% year-to-date. The U.S. Treasury 10-year yield soared nearly 80 bps during the quarter, closing at 4.59%, its highest since 2007. The yield curve “bear-steepened” with long-term rates rising more than short-term rates. As a result, the inversion between the 2-year and 10-year U.S. Treasury yields shrank from 106 bps to 44 bps. TIPS outperformed as 10-year breakeven spreads widened from 2.22% to 2.35% over the quarter. Corporates outperformed U.S. Treasuries with excess returns of 84 bps while agency-backed mortgages underperformed (-85 bps of excess return). High yield corporates continued to post strong relative returns (Bloomberg Corporate High Yield Index: +0.5%) and are up 5.9% year-to-date. Municipal bonds also posted negative results: the Bloomberg Municipal Bond Index dropped 3.9% and the shorter duration 1-10 Year Blend was down 2.2%.

Global Fixed Income: The Bloomberg Global Aggregate ex USD Index fell 4.0% (hedged: -0.8%). Currency played a key role in results with strong performance from the U.S. dollar. The dollar gained just over 3% versus a basket of six trade-weighted developed market currencies (DXY). Emerging market debt indices were also negative (JPM EMBI Global Diversified: -2.2%; local currency JPM GBI-EM Global Diversified: -3.3%).

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