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  • John M West III, MBA, CFP®


Market participants went into the third quarter increasingly confident that a recession was off the table, thanks in large part to a continued healthy job market and consumer spending. We remain in the camp that a recession is coming, but delayed, which is why we continue our defensive positioning.

After a strong first two quarters, the market pulled back in the third quarter. The Fed’s latest ‘higher for longer’ phrase caused the markets to sell off and bond yields to rise. There was a risk-off posturing throughout the quarter and a pullback of the AI hype. If you remove the seven names that generated all of the growth in the S&P 500, the markets are actually now flat to slightly down for the year.

As a reminder, the index returns above should only be used as a very broad point of reference.

Cash & Fixed Income: High-yield corporate bonds led for the past 1, 5, 10, and 15 years, with cash leading for the quarter and 3 years. Municipal bonds were the laggard for the quarter and year-to-date, aggregate bonds for the past 1, 3, 5, and 10 years, and cash was the worst performer for the past 15 years.

We will continue to be slightly overweight in cash and equal-weight fixed income until there is clarity on the economic environment. As yields rose throughout the quarter, we added to fixed income as rates are nearing their peak for this cycle.

Equities: Large U.S. stocks led for all time periods other than the 1 year, where foreign equity was the best performer. Real estate was the worst performer for the quarter, 1 and 3 years, small-cap stocks were the worst performer for the last 5 years, and foreign was the laggard for the past 10 and 15 years.

As a result of our defensive allocation, the portfolios have held up better during this recent market selloff. As uncertainty continues, we remain cautious. In the meantime, we are compensated for sitting in cash and bonds as they reset to higher rates, which means that a diversified (cash/bonds, stocks, and alternatives) portfolio still provides the best risk-adjusted returns to meet your financial goals.

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