Key changes from September report:
- Downgrading financials view to negative from neutral.
- Upgraded our view of duration to neutral
- Lowered S&P 500 Year-End Fair
- Value Target to 4,000-4,100 from 4,300-4,400.
Investor sentiment was hit from multiple directions in September, but fears that a more hawkish Federal Reserve (Fed) would drive a hard landing for the U.S. economy following disappointing August inflation data was the top cause of the market’s struggles. Surging interest rates, a likely recession in Europe, and concerns about a potential U.K. currency crisis also contributed to a tough month for stocks. The S&P 500 Index tumbled 9.3% in September, temporarily breaking below the June 2022 closing low.
The index has lost 23.9% year to date through September 30.
Core bonds, as measured by the Bloomberg Aggregate Bond index, lost 4.3% during the month as Treasury yields were steadily higher in August. The belief by the Fed that short-term interest rates need to continue to go higher and stay there pushed Treasury yields higher during the month.
The Strategic and Tactical Asset Allocation Committee (STAAC) upgraded its view of duration to neutral. Now that interest rates have moved higher, we believe opportunities in fixed income have improved and are looking to add back to certain areas within fixed income that may benefit.
The STAAC Committee’s revised S&P 500 year-end fair value target of 4,000-4,100 is based on a price-to earnings ratio of 17.5 times the Committee’s 2023 S&P 500 earnings per share forecast of $230.
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Credit Quality is one of the principal criteria for judging the investment quality of a bond or bond mutual fund. Credit ratings are published rankings based on detailed financial analyses by a credit bureau specifically as it relates to the bond issue’s ability to meet debt obligations. The highest rating is AAA, and the lowest is D. Securities with credit ratings of BBB and above are considered investment grade. Duration is a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. It is expressed as a number of years.
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Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-toearnings valuation ratio.
Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.
All index data from FactSet.
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