Investment Committee Meeting Highlights October, 2023


While September did not start off that painful in capital markets, the second half of the month saw sharp downward moves across most major asset classes. Yields continued to move higher, putting pressure on bond prices and equity markets pared back on their year-to-date gains. Developed international, represented by the MSCI EAFE, relatively outperformed, declining 3.42% compared to the S&P 500’s 4.77% decline. US mid and small cap companies also struggled, where the Russell Midcap and Russell 2000 indices gave back half or more of their prior year-to-date gains during the month.

Across the economy, core inflation continued to improve despite a jump in headline figures with increasing energy prices. The cost of oil and gas has surged recently, leading some market commentators to expect $100 per barrel in the near future. As of the end of September, WTI crude oil was at $90.79, up from $66.51 earlier this year. While not materially impacting markets, investor sentiment was affected by concerns about the auto strike and the government shutdown. Moody’s, the last major credit rating agency giving the US its highest rating, effectively put out a warning about growing political dysfunction that could threaten its stance.

The Fed will convene again from October 31st to November 1st, and the next inflation report will be released on the 12th. As of the end of September, the Fed Fund Futures market was implying an 82% chance the Fed will hold rates steady following their next meeting. The cooling trend in consumer data has continued lately, but monthly gains have remained the norm despite a slowdown in some measurements. Despite a cooling trend in increasing job numbers, the labor market remains supported thus far, with initial jobless claims consistently coming in below expectations.

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The second half of September was markedly different than the first half, with market trends moving sharply lower, though not enough to spoil the strong positive trends seen throughout most of the year. The markets are attempting to digest a few one-off concerns, such as the resumption of student loan payments, government shutdown threats, and strikes, along with the broader economic and inflation concerns that have been front and center for a while now. It remains to be seen whether the pockets of negative trends in August and September point to a broader story or just normal equity market fluctuations in a relatively strong year thus far.

The US Dollar Index is up for 11 straight weeks, making it the longest weekly winning streak since 2014. The US Dollar is benefiting from expectations that US interest rates could remain higher for longer. However, US companies doing business overseas have stated that the strong dollar is negatively affecting sales and lowering profit margins. In recent weeks, weak economic data from Europe and Asia, and rising investor confidence in a soft landing have contributed to the dollar’s surge, though the dollar is still down from last year’s multidecade highs.

Last October, members of The Organization of the Petroleum Exporting Countries (OPEC) slashed production by 2 million barrels per day. Then in July, Saudi Arabia announced an additional 1-million-barrel-a-day cut in production. On September 5th, both Saudi Arabia and Russia announced that they planned to extend their cuts through the remainder of this year. Recent supply cuts in oil production has driven oil prices to over $90 per barrel, fueling some to consider the potential for future demand pullback. OPEC and forecasters predict a global deficit of 3.3 million barrels a day in the fourth quarter, where many oil analysts now expect WTI Crude to surpass $100 per barrel.

Consensus Earnings Per Share (EPS) estimates for the S&P 500 serve as a barometer of the collective market expectations regarding the profitability of companies constituting the index. Analysts are expecting earnings growth to improve over the coming quarters and accelerate in 2024. The outlook for consensus EPS estimates can indicate broader market sentiment and economic outlook. A rising trend in estimates may signal bullish sentiment and a potentially expanding economy, while declining estimates could signify bearish sentiment and an impending downturn.

Yields on intermediate and long-duration US government bonds continued to climb in September amid news that the Fed plans to keep rates ‘higher for longer’. Compared to the end of June, yields on 10-year bonds have risen over 70 basis points, and yields on 30-year bonds have risen over 83 basis points. Both are significant moves for US government bond yields in a three-month period. At the margin, the moves have slightly reduced the magnitude of the yield curve inversion, though the baseline expectation should still be that for the yield curve to normalize, yields at the short end of the curve will likely need to come down.

In August, existing home sales dropped to their lowest level this year, down 0.7% to an annualized pace of 4.04 million. Year-over-year, sales fell by 15.4%. The decline in existing-home sales can be attributed to a combination of factors, including elevated prices, high mortgage rates, and limited inventory, resulting in one of the least affordable housing markets on record. While high home prices typically incentivize homeowners to sell, the current 11-year high in mortgage rates has made homeowners reluctant to do so, resulting in low existing home sales.

We remain cautiously optimistic and continue to use a quantitative investing approach. In times of uncertainty, it is more important than ever to follow the data and not make decisions based on emotions. Hilltops partnership with Helios relies on facts and data, which we use during our recalculations on a bi-weekly basis. Our models adjust appropriately to market conditions.


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