Stocks opened the third quarter on a volatile note but rallied to finish the quarter in positive territory, with gains across the size and style spectrum. The S&P 500 index finished the third quarter with a +5.9% gain and is up over +30% in the past twelve months.

Over time, the stock market responds more to long-term earnings trends and broad-based economic growth, not to changes in political leadership. Politicians come and go, but the desire to grow, innovate, and pursue profit remains a constant.   

The stock market is flirting with all-time highs, and that has some investors worried. But the data tell us that all-time highs in the stock market tend to be followed by more all-time highs – a lot more of them.

In our view, hotter-than-expected economic growth drove bond yields higher—and stocks lower—for the quarter.

The U.S. economy continued to grow in the first half of 2023, despite forecasts indicating otherwise. The bright spot looking forward is that monetary policy is already tight, which we think signals that the peak in the interest rate cycle is likely very close – which is good for risk assets looking ahead.

With a clearer picture emerging of what exactly took place in the regional banking sector, we now view the bank stress as more of a crisis of mismanagement than a symptom of systemic risk lurking throughout the banking sector. As Jamie Dimon wrote in his annual shareholder letter, “many of the risks were hiding in plain sight.”

Most bank failures historically have been caused by credit risk issues, but SIVB and SBNY were unique cases where mismanagement of interest rate risk—combined with a run on deposits—deemed both banks insolvent in just a matter of days. As we explain in this post, these two banks were largely in a league of their own in terms of their exposure to risk, which is one of the reasons we do not think financial contagion is likely.

2022 was a year beset by challenges, led by the Russia-Ukraine war, global supply chain disruptions, high inflation, rising interest rates across much of the developed world, and pronounced economic weakness in Europe and China.

The third quarter repeated a familiar pattern we’ve seen in 2022, where every time the markets have tried to price-in a peak in the interest rate cycle, some combination of strong labor market data, stubbornly high inflation, and central bank policy has pulled it back.

Downside volatility has been pronounced. The focus now, in our view, should be ensuring participation in the stock market’s recovery once it takes hold, which will assuredly be before economic data confirms the U.S. economy is in good shape.

The stock market’s ups-and-downs can be unsettling, and we empathize with the difficulties in keeping a steady hand—especially when the economy and markets feel as though they’re in disarray. But we also believe now is a time to remain patient, and to remember that short-term volatility is the price all investors pay for attractive long-term returns.

Investors are weighing a laundry list of unknowns in the current environment—how quickly the Fed will raise rates, whether and when inflation will moderate, how long Russia’s war will continue, whether the war escalates and turns global, and whether the pandemic is truly over. Our base assumption is that equity market volatility will continue as these questions continue to weigh on sentiment.

2021 was quite an unusual year for the world, but not necessarily for the capital markets. U.S. stocks strongly outperformed foreign shares, with every sector in the S&P 500 finishing up +15% or more. We do not believe all areas of the market will do well in 2022, however. Rising rates are likely to result in multiple compression in certain areas of the market.

The highly anticipated ‘post-pandemic economic boom’ took a pause in Q3, as yet another Covid-19 surge led consumers to retrench in July and August.

The upshot for investors, however, is that macroeconomic headwinds all appear to be temporary, and none appear significant enough to derail the growth trajectory of the U.S. for the balance of 2021.

The U.S. economy is clearly on strong footing. Strong spending, accelerating demand, and tight inventories are likely to keep inflation as a headline risk, and continued strength in the jobs market and wage pressures may motivate the Federal Reserve to shift into monetary tightening mode sooner than later—at first by tapering bond purchases, and eventually by raising interest rates.

U.S. stocks marched higher in the first quarter, with the S&P 500 pushing through 17 new highs and reaching 4,000 for the first time. “Risk-on” sentiment is being driven by improving economic data, a sense that the pandemic is nearing its end in the US, and what is perhaps the greatest fiscal stimulus experiment in the country’s history.

The S&P 500 index priced-in the pandemic-fueled recession in record time, but it also rallied sharply off the bottom in given hyper-accommodative monetary policy, massive fiscal spending, and anticipation of a strong growth rebound sometime in 2021. In spite of all the challenges 2020 presented, U.S. stocks rose +18.4% for the year.

When it comes to politics, many investors like to assume their political party is better for the stock market, or that a specific balance of power between the president and Congress is ideal for business and the economy. The reality: the stock market has shown virtually no political preference over the years.