Skip to main content



The S&P 500 reached a 2023 high at the end of July before selling off 7.5% through August and September to finish the quarter down 3.3%. Small-cap stocks (Russell 2000) also had momentum early in the quarter but changed course and ended the quarter down 5.1%.

Developed international stocks (MSCI EAFE) declined 4.1% in the quarter. Emerging market stocks (MSCI EM) fell 2.9%. The U.S. dollar (DXY Index) climbed over 3% during the quarter, resulting in a headwind for foreign stock returns.

In bond markets, the 10-year Treasury yield rose nearly 70 bps in the quarter, ending the period at 4.59% – the highest level since before the financial crisis in 2008. As a result, core bonds (Bloomberg U.S. Aggregate Bond Index) fell sharply, declining 3.2% over the quarter. High-yield bonds (ICE BofA US High Yield) managed to eke out a small quarterly gain.

The Magnificent Seven Stocks Continue to Power U.S. Equity Returns

The story of the first seven months of 2023 had been the divergence of returns between the “Magnificent Seven” (Amazon, Apple, Google (Alphabet), Meta, Microsoft, Nvidia, and Tesla) and the rest of the equities markets. Despite stalling in the latter half of the third quarter, the year-to-date performance of the “Magnificent Seven” stocks (Amazon, Tesla, Apple, Microsoft, Nvidia, Google, and Facebook) continue to explain most of the U.S. stock market’s returns. These seven stocks have collectively increased more than 80% this year, while the remaining 493 stocks in the S&P 500 are basically flat. While a concentrated portfolio of these seven names may sound appealing, an equal-weighted mix of those same stocks lost 46% in 2022. Investors essentially broke even in these names over the last 21 months.

As a result of their massive outperformance, the “Magnificent Seven” have a combined $10.7 trillion market cap and constitute more than 30% of the S&P 500 index. This level of concentration at the top of the U.S. market exceeds what was witnessed in 2021 and the tech bubble of the late 1990s / early 2000s. The early 1970s represent the last time the market was as concentrated as it is today.


From a macroeconomic perspective, the big question remains whether the U.S. economy can avoid a recession, and the timing if one does occur. If the Fed can manage to slow the economy while avoiding recession, we would expect to see the market’s gains broaden beyond the large-cap technology-related sectors. Conversely, if the Fed’s monetary tightening cycle leads to recession, it would likely lead to broader-based declines.

There are reasons to be cautious. We have seen one of the quickest and sharpest tightening cycles in history, and lending standards have tightened considerably. Both factors contribute to recessionary conditions. Since 1931, there have been 19 hiking cycles, and in only three instances did the economy avoid a recession.

If the economy falls into recession, we believe it will be relatively mild. There are several data points supporting a more positive outlook for the economy (strong consumer spending, healthy household balance sheets, etc.). and if a recession were to occur it would be one of the most anticipated recessions in history. Amid all this built-up anticipation many companies have already laid off workers and slowed hiring. These corporate moves help loosen the labor markets and potentially ease inflationary pressures.

Speaking of inflation, it has come down meaningfully from its June 2022 high of 9.1%. Recent inflation data show it has declined to 3.7%, suggesting the Fed’s policy has been working and that the current interest rate hiking regime may be coming to an end.

The rise in interest rates has negatively influenced bond returns, which have suffered steep losses over the past couple of years. The silver lining is that looking forward, bond yields ended the third quarter at their highest level in nearly 20 years (the Bloomberg Aggregate Bond Index ended the quarter yielding 5.4%). Higher starting yields should lead to higher expected returns. We remain positive on core bonds given their combination of healthy fundamentals, attractive current yields, and the downside protection they provide portfolios in the event of a recession.

In addition to core bonds, we continue to have meaningful exposure to higher-yielding, actively managed, flexible bond funds run by experienced teams with broad opportunity sets. There are several fixed-income sectors outside of the traditional parts of the bond market that provide attractive risk-return potential. Some of these funds are currently yielding in the high single digits while maintaining an eye on capital preservation and interest rate risk.

Within our portfolios, we maintain significant exposure to U.S. stocks overall and hold many of the mega-cap tech stocks mentioned in this commentary through our ETFs. However, given the strong performance of the “Magnificent Seven,” we believe they are trading at expensive valuations and not adequately reflecting a recession risk. While the “Magnificent Seven” is expensive, other parts of the U.S. stock market are reasonably valued, so we remain diversified across styles (i.e., growth, value) and market caps (larger and smaller cap stocks) to take advantage of those opportunities.

Overall, we remain slightly underweight equities. We have also extended the average maturity of our bond portfolio to align more closely with the benchmark, believing that we are approaching the end of the rising interest rate cycle.


As we look ahead, the timing and magnitude of the Fed’s response to economic data will be critical in determining if we experience a mild recession. We can’t rule out the possibility that the Fed threads the economic needle and successfully guides us to a soft landing of lower inflation and slower economic growth without a recession. Given the uncertainty, we expect volatility and we think that it will be more critical than ever to be ready to take advantage of market dislocations. This is not to suggest that we are changing our stripes as long-term investors. We continue to believe that taking a disciplined long-term view is the path to successful investing. We will maintain a balance of offense and defense, seeking attractive risk-reward opportunities that are supported by thorough analysis.

As always, we thank you for your trust and welcome any questions you may have.

Be sure to read the other articles featured in our October 2023 newsletter: