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Quarterly Review – Q3 2023

Summary: Q3 2023 was largely defined by summer chop driven by tempered AI expectations, continuation of a strong labor market, and uncertainty over inflation and further rate hikes out of the Federal Reserve. Inflation prints thus far in 2023 have averaged .31% SA month/month which projects an annual inflation of around 3.8%, while core inflation has averaged .28% SA month/month which projects a slightly better yearly target of 3.5%. This is roughly in line with the Fed’s median year-end target on PCE inflation so, despite the rise in yields, the likelihood of further rate hakes is quite small at present.

Performance: Q3 2023 portfolio performance slightly underperformed broad equity baskets as summer chop was particularly impactful to the downside on high-risk tech plays. The portfolio has remained concentrated in these long duration assets, however a mid-quarter rebalancing to mitigate expected volatility helped eliminate some of the downside risk.

Outlook: The case for a late year rally is in play as risk-on headwinds, namely the dollar, energy, and yields, show signs of exhaustion. Equity resilience in the face of these headwinds is further evidence that the end of this dollar/energy/yield rally may be nearer than market pundits would have you believe. Recession sentiment has hit a high note of late, and I believe Q4 will prove these worries unfounded. Forecasts of rate cuts suggest the 2023 recession everyone is planning for is more likely to hit around the middle of next year. This sets up a perfect pain trade through the end of this year into early 2024.

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JANUARY 12, 2025 OBSERVATIONS

Multiple selloffs in equities following strong jobs and ISM data highlights a general concern of returning inflation at a time when valuations are already quite...
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