The third quarter of 2023 commenced with an increase in positive sentiment with a US debt ceiling crisis avoided, the US banking crisis of March seemingly in the rearview mirror, core and headline inflation having clearly begun to trend down, and the S&P500 up 23% from its October 2022 lows. This sentiment began to turn in August and continued in September as US treasury yields increased. A combination of excess supply of US treasuries into the market, ongoing strong employment markets, and an increase in headline inflation mainly driven by energy prices, all combined to push the US 10-year treasury yield from 3.83% at the beginning of the quarter to 4.57% by the end of September. This drove losses across most asset classes.
Australian equities had a tough quarter with the S&P/ASX 200 Total Return Index falling 0.77%. The best-performing sectors were Energy +12.34%, Consumer Discretionary +5.86%, and Financials +2.79%. The worst performing sectors were Healthcare -8.49% as concerns around weight loss drugs weighed on Resmed and the index, Tech -5.8% and Consumer Staples -5.28%.
The MSCI world total return index fell 0.43% over the quarter with the best-performing sectors being Energy +11.64% and Communication Services +1.59%. Amongst the worst-performing sectors are Utilities -8.96%, REITs -7.09%, Consumer Staples -6.23%, and Tech -6.02%. US Equities underperformed the MSCI world with the S&P 500 falling -3.65%, the tech-heavy Nasdaq down -4.12%, and the broader Russell 2000 being the worst performer -5.49% as yields rose across the quarter. European equities were mixed over the quarter with the FTSE 100 closing out the quarter +1.02% while the Euro Stoxx was much weaker finishing the quarter -at 4.43%.
Infrastructure and Property assets were hit hard by the rise in bond yields given they often behave as bond proxies within equity markets. Global Listed Property markets were down 5.40% while Global Listed Infrastructure fell 7.94%.
International Fixed Income
Global bond markets sold off for the quarter, driven by the aforementioned backup in US yields. Other bond markets were less negative given some of the US-specific factors driving the US yields, but the overall trend was nevertheless the same. Global Fixed Interest Markets were down 2.14%
Australian Fixed Income
The Aussie Bond market was down only slightly at -0.28% for the quarter.
It’s hard to believe that the US economy is forecast to grow at above-trend growth for the remainder of 2023. With that said, the US economy is on a knife edge where weaker growth could tip it into recession while stronger growth could trigger a second wave of inflation. Both scenarios, a slowing economy or a second wave of inflation, will eventually culminate in a recession. If growth remains below trend, the US will probably succumb to a mild recession in the second half of 2024. If demand rises above trend and inflation starts to reaccelerate, the Fed will need to slam on the brakes. This would trigger a deeper recession, although one that probably does not start until early 2025.