Market insights and analysis

How dynamic, risk-managed investment solutions are performing in the current market environment

4th Quarter | 2023

Quarterly recap

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Current market environment performance of dynamic, risk-managed investment solutions.

By Jason Teed

Inflation continued to be the major factor affecting markets in the third quarter. The second quarter saw the largest interest-rate increases in recent memory. The third quarter saw the continuation of those increases.

The third quarter began with big gains in the equity market. The S&P 500 Index rose about 14% early in the quarter, and bond investors saw some relief as well. This environment was powered by strong corporate earnings and hope that inflation pressures were subsiding, which was suggested by several reports in early June.

But the Federal Reserve continued its aggressive approach to raising interest rates. The market had bet that the Federal Reserve would continue to prop up markets in the event of anything but a “soft landing.” But by mid-quarter, inflation reports were coming in with stronger-than-expected readings. This, coupled with geopolitical concerns out of Russia put intense pressure on equities, which lost all quarter-to-date gains and then some.

Ultimately, the S&P 500 fell about 4.9% for the quarter, and the early market movements were dubbed a “bear market rally.” Cyclical sectors tended to outperform, though not exclusively. The best-performing sectors were Consumer Discretionary and Energy, while Materials and Technology were the worst performers. Despite poor performance overall for equities, some sector-rotation trading strategies were profitable during the quarter. This highlights the importance of active management, particularly when most asset classes appear to move in tandem.

While equity markets experienced volatility during the quarter, the U.S. dollar rallied on higher interest rates. Many central banks have begun increasing rates in an effort to stymie inflation that is occurring worldwide. However, the U.S. came into the quarter with the most economic strength, and so the Federal Reserve has been able to implement higher interest rates than other developed countries. This has made the U.S. dollar attractive, pushing its value up about 7% for the quarter. Typically, when the dollar is strong, other assets priced in dollars decrease in value.

Traditional safe havens provided less protection than usual during the quarter. Gold fell about 8.2% as the value of the U.S. dollar climbed. Gold prices over the quarter moved in almost the exact opposite direction of the dollar. Long-term Treasurys also fell about 10.3% for the quarter amid rising interest rates. When equities fall due to increased rates used to fight inflation, the correlation between bonds and equities tends to increase. This, in turn, reduces the ability of bonds to provide diversification in a portfolio and to protect investor assets. This quarter was no exception. The U.S. dollar was the most resilient safe haven, which seems counterintuitive when inflation is running high.

The recent poor performance of almost all asset classes this quarter meant only about 5% of our strategies posted quarterly gains, though about 73% of our strategies outperformed the S&P 500 during the period. Our top performers were mostly tactical equity strategies that timed the market properly, as well as aggressive rotational strategies that took advantage of assets and market segments that outperformed the market. Contrarian S&P Trading was our best-performing strategy for the quarter, while QFC Evolution Plus Aggressive was our best-performing QFC core strategy. The quarter was challenging for aggressive tactical equity strategies whose periodicity was in line with market rebounds and subsequent falls. These strategies experienced whipsaws during the quarter.



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