Potholes: Q3 Commentary

There are very few places in the US where potholes are such a part of the “charm” of living in a city.  They have a life of their own here in New Orleans. These beasts can eat your tires, if not your entire car, alive. Is a puddle just a puddle or is it 4 inches deep? Hard to say.

Potholes come to mind when I think of last quarter. It began with focus on smooth roads. Those smooth conditions haven’t changed dramatically. Economic growth remains robust. Consumer spending continues stronger than expected. Employment remains at one of the highest levels in history, yet inflation seems to be moving down toward longer term expectations.

The market perhaps got a little too hopeful about avoiding the standard economic impact of high interest rates. It priced in interest rates cuts toward the end of this year and across 2024. The hope of the “soft-landing” built in momentum.

Then potholes started slowing things down. The United Auto Workers strike, the threat of a government shutdown, higher oil prices, geopolitical concerns, and the anticipated resumption of student loan repayments made the landscape look a lot more like driving down a New Orleans side street than cruising the Autobahn. In September, the Federal reserve paused on an additional interest rate hike but the “higher for longer” rhetoric by Chairman Powell was enough to rattle the market.

As a result, the MSCI ACWI net Total Return Index lost -3.40% in the 3rd quarter. The S&P 500 Total Return Index lost -3.27%. Both remain positive year to date with the MSCI ACWI up 10.6% and the S&P 500 up 13.07% year-to-date through the end of September.

Despite the pause in interest rate hikes, the Bloomberg US Aggregate Bond Index lost -3.23% over the quarter, giving up any gains and falling into slightly negative territory year-to-date as longer dated bonds repriced to expectations of high rates for longer.  Bond holders also seem to be demanding additional premiums to hold US Treasuries as the debt ceiling standoff, the continued concern over a government shutdown, and US Debt downgrade by Fitch weighs on investors.

The road looks a bit more difficult than it looked a few months ago. Just as we expect the potholes in New Orleans, these difficulties are not unexpected for this stage in the economic cycle. For the short-term investor, please keep us up to date with your expected needs. For the long-term investor, we will look for opportunities as we move through the cycle.

While there is not much worse than hitting an unexpected pothole at top speed, there is one part of the pothole culture in New Orleans that gives me hope. It warms my heart when I’m alerted to a pothole because a kind soul has marked it, or even better, decorated it in a way that makes me smile. It’s a little reminder that my neighbor is looking out for me. As the potholes emerge in the market, I hope you know we are looking out for you too.  

The S&P 500 Index is a market capitalization-weighted stock index. It is comprised of about 500 stocks of the largest capitalization companies that are traded on U.S. stock exchanges. The MSCI ACWI Net Index measures the performance of large and mid-cap companies across 23 Developed Markets and 27 Emerging Markets. The MSCI ACWI® Net Index subtracts foreign taxes applicable to US citizens. The Bloomberg US Aggregate Bond Index measures the return of investment grade debt across the US market. Both measure the return assuming that interest, capital gains, and dividends are reinvested.

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