The third quarter of 2023 report described a year of mixed messages. It noted that the seven largest companies in the S&P 500 Index had risen by an average of more than 50% year to date, while the remaining 493 constituents had gained less than 5% on average. It also cited data showing that fewer than a third of active managers in the US were outperforming their benchmarks, the worst outcome in well over a decade. The report referred to a bull market in equities linked to artificial intelligence and to a US economy that had been more resilient than consensus expected.
Bond yields had made a round trip. The 10-year US Treasury yield was 4.2% in October 2022 and 3.3% in March 2023, and had recently touched 4.8%. The report gave 2-year, 5-year and 10-year US Treasury yields of 5.031%, 4.447% and 4.302% a month earlier, and 5.081%, 4.751% and 4.732% at the time of writing. The yield curve, deeply inverted at the start of the year, appeared to be in the early stages of reversing its inversion.
The report said markets had been pricing in interest rate cuts from the first half of 2024 but were now pricing in the central bank message of 'higher for longer'. It reviewed the cycle since 2021: interest rates at or close to zero until the end of 2021, then falls in bond and equity prices that reached a climax around September and October 2022, with inflation at around 10% and Europe in an energy crisis. Markets then priced in falling inflation for nine months, with optimism peaking towards the end of the second quarter of 2023, before interest rate expectations were repriced over the last three months. The report described equity markets as having moved sideways overall since the end of 2021, and noted that the MSCI All Country World Index was 10% below its all-time high.
The report also discussed the effect of higher funding costs on smaller and more highly leveraged companies and the uncertain timing of any shift in central bank policy.
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