as of September 30, 2023
Global equity markets moved lower during the quarter, largely driven by an increase in longer-term rates as markets priced a higher for longer rate environment. Volatility remained subdued for most of the quarter before moving higher during the final weeks amid the spike in rates. Global economic growth has proved resilient so far in 2023, but is set to slow as several positive tailwinds fade. US economic activity has been remarkably strong, supported by the drawdown of pent-up savings, strong private investment and expansionary fiscal policy. These should fade in Q4 and beyond, but we still expect the US to avoid a hard landing.
US inflation has fallen significantly. Headline CPI was up 3.7% year-over-year through September, while core CPI stood at 4.1%. Inflation should continue to decline as remaining inflationary components such as shelter rollover. Labor markets remain tight and could put upward pressure on inflation into 2024. A potential slowdown in US growth would likely ease the labor market and reduce wage pressures. With rates firmly in restrictive territory, central banks are cautiously moving from increasing rates to pausing. Federal Reserve officials suggest the possibility of further rate hikes. However, bond market pricing suggests they have reached their peak policy rate for this cycle, albeit with rate cuts pushed further out.
After strong gains during the first half of the year, global equities declined during Q3, with the MSCI ACWI falling 3.4%. The index has gained 10.1% year-to-date. The S&P 500 fell 3.3% during the quarter, and it is now up 13.1% in 2023. International developed stocks declined 4.1% in Q3, bringing their 2023 gains to 7.1%. Emerging market equities fell 2.9% in Q3 and have gained 1.8% year-to-date.
Within fixed income (bonds), the Bloomberg Aggregate Index declined 3.2% during the quarter. Treasuries declined 3.1%, in line with the losses for corporate bonds. The yield curve shifted higher during the quarter, primarily for intermediate and long-term maturities.
Global developed REITs declined 5.6% during Q3, lagging broader equity markets on higher rates. Infrastructure stocks shed 7.8% during the quarter. Commodities generally increased during the quarter along with natural resource stocks.
Our outlook for global equities has improved as a result of the recent pullback, negative investor sentiment and the prospect for economic normalization. Although, high US equity valuations remain a concern. We believe the sell-off in Treasuries has brought yields into attractive territory. The biggest risk we see is if inflation remains sticky, leading to further rate increases, which could increase the risk of a hard landing and further weakness for stocks and bonds. Geopolitical risks have returned to the forefront amid the conflict in Israel. The human impact has been tragic. While the initial market impacts have been limited, there is the risk of escalation with potential impacts on oil markets.
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