Q3 2023 Plan Performance
By Constantine Mulligan, Director of Investments Partner, Cerity Partners LLC
2023 is shaping up to be a tale of two drastically different halves. The first half consisted of no recession despite much anticipation and prognostication, stronger risk asset returns, and a perceived plateauing of broad inflation. The second half started with elevated market volatility, negative total returns across many asset classes (equity and fixed income), and the reemergence of fiscal policy and consumer spending issues. Broad equity indexes, both US and international, were down a few percentage points on the quarter while fixed income returns were also down as interest rates continued moving higher.
Overall, the investments in the Plan remain consistent and competitive over the long term on both an absolute and risk-adjusted basis when compared to respective peer group averages and indexes. They continue to do so at exceptionally low costs when compared to peer averages, as almost every fund can be found within the lowest-cost quartile.
A significant portion of plan assets are invested in the well-diversified target date offering (the American Funds Target Date Retire funds). They have routinely been one of the most competitive target date options when compared to the target date investment universe. These fund-of-fund strategies are comprised of actively managed funds within each dated vintage, but are still considered low cost, all else being equal.
The JPMorgan Equity Income fund was added to the Watch List, given the recent retirement announcement by lead portfolio manager Clare Hart. There is not much immediate concern as the announcement has been well-telegraphed and includes a concrete long-term transition plan.
For our clients who wish to take a deeper dive, we have provided the following economic and market commentary. This will provide an explanation of the overall macro and micro economic factors influencing the markets and, in turn, your Vista 401(k) account. If you have any questions or wish to discuss these matters in greater detail, please contact us at (866) 325-1278 or e-mail us at 401k@Vista401k.com.
3rd Quarter 2023 Economic and Market Recap
With three months left in the year, most U.S. recession forecasts have been postponed to 2024. A Fed hiking cycle, a troubled regional bank sector, an anemic housing market, and an unstable fiscal and political outlook have failed to pull Gross Domestic Product (GDP) growth much below trend, let alone below zero. After growing at 2.2% in Q1 and 2.1% in Q2, Q3 looks even stronger and should come in at around 2.5%. Underpinning this economic resilience is a still-flush consumer that has a job with a growing wage and continues to spend. Real (inflation-adjusted) Personal Consumption Expenditures continue to chug along at year-over- year rates north of 2%, with particular strength in the service sector. It will be difficult to see any recessionary scenario without a material slowdown in service spending, which makes up roughly half of U.S. GDP. Beyond some potential cyclical headwinds such as dwindling pandemic savings, and resuming student loan payments, we see new structural consumption tailwinds emerging as the baby-boom generation continues to retire.
The overall European economy continued to skirt a recession in the quarter, but growth is anemic with Germany likely in recession due to the pressure of higher energy prices and disappointing growth in China, an important export destination. The southern tier countries, which tend to have stronger services economies, are beginning to feel the impact of high inflation with consumer spending slowing throughout the quarter. The Japanese economy has been boosted by exports to the U.S. and a weaker yen, which declined another 2.5% during the quarter and helped boost exports.
Concerns about sticky wage inflation have kept the Fed focused on the tight labor market. The central bank’s goal of reducing job openings and employee turnover, rather than forcing layoffs, seems to be working so far. Wage growth has indeed begun to roll over without an accompanying increase in the unemployment rate, keeping soft landing hopes alive. After raising the fed funds rate by 25 basis points in July, the Federal Open Market Committee (FOMC) held rates steady at the 5.25%– 5.50% target range in its September meeting. A revised Summary of Economic Projections revealed a median estimate among Fed members of one more hike this year, and two cuts next year (down from four in the June release). GDP growth for 2023 was revised up to 2.1% from 1.0% while the year-end unemployment rate was revised down from 4.1% to 3.8%.
After a very strong first half of the year, U.S. equity markets lost some steam in the quarter. The S&P 500 Index fell by close to 4%, reducing its year-to-date performance down to a still strong 12%. Value stocks outperformed growth stocks as the energy sector emerged as a clear market leader, while the previously dominant “magnificent seven” (Meta, Alphabet, Amazon, Apple, Microsoft, Nvidia, Tesla) retreated. Developed international equity markets were down in the quarter, but outperformed US equities as they tend to be more exposed to the value or defensive sectors of the market. Emerging market equities declined as the Chinese market struggled with a slower than expected rebound after the removal of severe Covid restrictions and acute pressure on its property sector.
Higher interest rates, higher energy prices, and a potentially protracted United Auto Workers strike will likely exert some downward pressure on the U.S. economy in the fourth quarter. The resilient U.S. consumer will be tested, but job and wage growth over the coming months should continue to support spending. With the economy experiencing more of a rolling recession than an economy-wide decline, the housing market downturn, which began last year, appears to be bottoming — though mortgage rates will impede a near-term recovery. The manufacturing sector may be in recession moving into the fourth quarter as businesses work down excess goods inventories accumulated at the end of the pandemic. This leaves the service sector, which continues to grow at impressive rates through three quarters of the year. While higher interest rates and higher prices may reduce demand slightly, robust consumer income should prevent a meaningful downturn.
September 2023 Fund Performance Chart
Click here to View the Chart Below