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Q3 Reflections: Navigating Market Challenges, Curiosity Charges, and the Rise of AI


Nov 9, 2023


In our newest third quarter reflections webinar, Co-Chief Funding Officers Lindsey Woodward and Matt Rivera discover market efficiency in Q3 2023, power sector fluctuations, the impression of Synthetic Intelligence, rates of interest, and the importance of rebalancing your portfolio.

A Historical past of Markets By means of Troublesome Instances

There are a lot of difficult and heartbreaking realities on this planet. Whereas Abacus’ focus is primarily by a monetary lens, we by no means need to reduce or neglect the real struggling so a lot of our fellow people endure. The way in which we strategy investing continues to be as conscious as potential to assist impact as a lot optimistic change on this planet that we are able to realistically carry.

Peering by that monetary lens then, the markets are sometimes marked by uncertainty and the headlines can certainly be intimidating. In at the moment’s world, it’s straightforward to really feel apprehensive about each world occasions and your funding portfolio. In these moments, it’s essential to keep in mind that historical past has proven us that regardless of short-term turmoil, the markets have traditionally rewarded systematic, long-term funding methods.

Take into account the timeline in Exhibit 1 that spans from 1970 to the top of 2022. It paints an image of the market’s resilience all through numerous crises, such because the Y2K scare, Hurricane Katrina, and a number of wars. Even within the face of such adversities, the market continued to develop, rewarding traders who remained dedicated to their funding methods.

Chart showing markets through difficult times
Exhibit 1: Development of the united statesDollar from 1970-2022. From Dimensional Fund Advisors LP in US {Dollars}. MSCI information 2022.

This historic perspective serves as a reminder that whereas the present instances could also be difficult and anxiety-inducing, historical past teaches us that staying invested throughout turbulent intervals can result in long-term monetary success. 

Q3 and Yr-to-Date Inventory Market Overview

The third quarter of 2023 offered a number of challenges for the inventory market. Throughout the board, inventory indices skilled declines. This decline is notable once we look at the efficiency of various asset courses in the course of the quarter.

Within the U.S., large-cap shares fared higher in comparison with small-cap shares, whereas worth shares confirmed a marginal outperformance towards progress shares. Nevertheless, these percentages didn’t replicate the total image of the previous 12 months.

Chart comparing third quarter US stock market returns compared to 1 year returns
Exhibit 2: Inventory market efficiency for Q3 2023 and 1 12 months as of 9/30/2023. eVestment. evestment.com

When contemplating the efficiency over the previous 12 months, the narrative modifications. Massive progress firms – largely because of the “Magnificent Seven” – led the way in which within the U.S. inventory market, outperforming their worth counterparts. Curiously, this pattern is the other exterior the U.S., emphasizing the significance of diversification in an funding portfolio.

Regardless of the difficult third quarter, the final 12 months has demonstrated strong efficiency within the markets, highlighting the long-term advantages of a well-diversified portfolio.

Q3 and Yr-to-Date Bond Market Overview

Throughout Q3, the Federal Reserve raised rates of interest in July to a 22-year excessive vary of 5.25% to five.5%. In September, charges remained regular, however the bond market was not immune to those modifications.

The Bloomberg U.S. Combination Bond Index returned -2.54% in September and -3.23% for the third quarter. This decline illustrates the sensitivity of bond costs to rate of interest fluctuations.

Third quarter US bond market returns
Exhibit 3:“Quarterly bond market efficiency for Q3 2023. Dimensional Fund Advisors. 7/1/2023 1 to eight/30/2023.

As depicted in Exhibit 4, the previous 15 years have been characterised by traditionally low rates of interest following the Nice Recession. At present, charges are shifting nearer to their long-term averages. Whereas rising charges generally is a hindrance for debtors, long-term traders within the bond market can discover alternatives, even when they expertise short-term pains.

Interest rates over time
Exhibit 4: Market yield on US treasury securities at 5 12 months fixed maturity. Federal Reserve Financial Knowledge. Fed.stlouisfed.org

Bond costs drop with rising rates of interest attributable to an idea referred to as alternative value.  Nevertheless, in rising fee environments bonds, particularly these held alongside hundreds of others in diversified mutual funds, permit traders to profit from the strategic reinvestment in higher-yielding bonds as present bonds mature and distribute earnings. 

Notably, Abacus’ bond mannequin portfolios have seen their yield to maturity greater than double previously two years attributable to strategic reinvestment in higher-yielding bonds. That is an instance of how a well-structured funding strategy can rework challenges into alternatives.

Power Sector Insights

The power sector’s efficiency within the third quarter was a stark distinction to its prior underperformance within the first and second quarters of 2023. Over the previous two calendar years, power has managed to outperform, however this comes after a difficult stretch, with poor efficiency in 5 of the eight years main as much as 2020.

Chart showing energy quarterly performance comparison vs the market
Exhibit 5: Power efficiency comparability vs world equities for the primary, second and third quarters of 2023. Dimensional Fund Advisors.
Chart showing the best and worst performing sectors from 2008 to 20022
Exhibit 6: Finest and worst performing sectors from 2008 to 2022. Dimensional Fund Advisors.

The power sector’s efficiency serves as a reminder that diversification is crucial, as particular sectors can exhibit vital volatility, impacting funding portfolios.

Rebalancing and How It Works

Image demonstrating rebalancing
Exhibit 7: For illustrative functions solely.

Diversified portfolios consist of assorted asset courses, every with its personal risk-return profile. These asset courses don’t transfer in tandem, inflicting portfolios to float away from their goal allocations. At Abacus, we monitor our consumer portfolios attentively and make use of strategic rebalancing to realign them with their supposed asset allocation.

This basic apply ensures that portfolios keep the specified threat profile and cling to long-term monetary targets. To keep up a simplified instance of what’s occurring in Abacus portfolios, think about a portfolio’s goal allocation is 60% shares and 40% bonds. If shares outperform bonds and shift the allocation to 70% shares and 30% bonds, a rebalance is important. This course of entails promoting shares and shopping for bonds to revive the portfolio’s desired 60/40 allocation.

Diligent portfolio monitoring and strategic rebalancing play an important function in conserving investments on monitor, notably throughout turbulent market situations.

AI in Finance

Synthetic Intelligence (AI) is a topic of rising curiosity and concern within the monetary world. To discover extra, we invited Gabe Brenner, an Abacus advisor and funding committee member, to share his insights on AI within the context of finance. Gabe not too long ago revealed three blogs on the impression of  AI  in finance together with, “Synthetic Intelligence, Your Portfolio, and Our Future,” “How a Chatbot Explains Monetary Concept,” and “Monetary Advisor vs. AI – Who Will get it Proper?” Throughout our dialogue, Gabe make clear some urgent issues.

What are the dangers of present-day AI?

Gabe highlighted a number of dangers related to present-day AI. First, he talked about the chance of automation and job displacement, notably for these in clerical or administrative roles. AI’s skill to automate sure capabilities inside jobs may result in job loss in particular sectors. Nevertheless, he additionally emphasised that this isn’t a brand new phenomenon and has been noticed all through historical past with technological developments. He pressured the significance of making ready for these modifications and focusing on the web advantages of AI for productiveness and financial progress.

One other threat Gabe mentioned is the potential for AI to propagate disinformation. AI, notably in producing textual content and pictures, could possibly be used to unfold deceptive info, which may have penalties, particularly in delicate areas like geopolitics. Moreover, AI has the capability to study from historic information, which incorporates prejudices current in human information. Because of this, AI methods can inadvertently reinforce these biases. He underscored the importance of guaranteeing that AI aligns with humanity’s must mitigate these dangers.

What does AI imply to your funding portfolio?

Gabe indicated that AI will seemingly change the funding panorama. He talked about Nvidia, an organization that designs pc chips, which has seen its inventory rise attributable to its chips’ relevance in AI purposes. Nevertheless, he cautioned that predicting which firms would be the future winners within the AI trade is difficult. Whereas some firms might initially possess a bonus, that benefit usually dissipates as others catch up. Regardless of potential productiveness enhancements from AI, predicting particular inventory market outcomes associated to AI stays extremely fraught.

How may AI impression the finance trade?

Gabe’s response highlighted that AI’s function within the finance trade may carry modifications. Whereas he didn’t foresee AI enabling correct market predictions, he recommended that AI’s major impression in finance could be on information evaluation and administration. AI’s data-processing capabilities may enhance productiveness in areas like monetary evaluation. Nevertheless, because it pertains to portfolio administration, he famous that the dynamic and unpredictable nature of monetary markets doesn’t align effectively with the secure patterns that AI usually depends on for making predictions. He additionally emphasised that the first concern must be guaranteeing that AI aligns with humanity’s pursuits, highlighting the significance of moral and regulatory issues.

In abstract, the twin nature of AI’s potential, presents each dangers and alternatives in numerous domains, together with employment, info accuracy, and monetary markets. It’s important for traders to remain knowledgeable and adapt to the evolving panorama the place AI performs an more and more vital function.

We’re Right here for You

The market’s historical past is a testomony to its resilience, and whereas challenges might come up, those that stay dedicated to their funding methods have a tendency to attain monetary success over the long run. As we navigate market modifications, Abacus continues to face by our dedication to offer shoppers with sound, data-driven recommendation to assist them obtain their monetary targets.

We encourage traders to give attention to their aims and keep the course, remembering that market fluctuations are a part of the journey. Your monetary well-being is our high precedence, and we stay devoted to helping you in your journey to monetary success.

When you have additional questions or want personalised recommendation, don’t hesitate to achieve out to your Abacus advisor or schedule a name. In a world full of monetary complexities, having a trusted advisor could make all of the distinction in serving your distinctive wants.


Historic efficiency outcomes for funding indices, benchmarks, and/or classes have been supplied for normal informational/comparability functions solely, and usually don’t replicate the deduction of transaction and/or custodial costs, the deduction of an funding administration payment, nor the impression of taxes, the incurrence of which might have the impact of lowering historic efficiency outcomes. It shouldn’t be assumed that your Abacus account holdings correspond on to any comparative indices or classes.

Please Notice: (1) efficiency outcomes don’t replicate the impression of taxes; (2) comparative benchmarks/indices could also be kind of risky than your Abacus accounts; and, (3) an outline of every comparative benchmark/index is accessible upon request.

Please Additionally Notice: This materials is just not supposed to function personalised tax and/or funding recommendation for the reason that availability and effectiveness of any technique relies upon your particular person info and circumstances. Abacus Wealth Companions is just not an accounting agency. Please seek the advice of along with your tax skilled concerning your particular tax scenario when figuring out if any of the talked about methods are best for you.


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