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Third Quarter Newsletter

Responsible Guidance:  Third Quarter 2023 Newsletter, October 2023

Hate to Lose?

We hate to lose, and unfortunately, most of the indexes we cover in our newsletter experienced losses during the third quarter.  But it is how you respond to losing that is most critical.  Many people feel the pain from losing is greater than the joy from winning.  If you feel this way, you may be susceptible to a behavioral bias called loss aversion.  This bias can negatively impact your financial decision-making and may have a negative impact on Your Personal EconomySM.

We are aware of behavioral biases and can help avoid loss-aversion pitfalls through education and experience.  By being students of the markets, we can educate our clients about historical market movements, considering many different market environments.

Over the last 70 years, the stock market has had more winning periods than losing periods, and the U.S stock market has never had a 20-year losing period.  Though there is no guarantee what has happened in the past will happen in the future, you should know that the historical odds of winning are better than the historical odds of losing.  Further, understanding the benefits of being in a risk-appropriate portfolio that is globally diversified may help when challenging market environments occur because there is a clear-cut strategy.  A well-planned strategy should also include planning for different market cycles and providing guidelines for what to expect in changing market environments.

As we start the fourth quarter, third quarter market performances may have created opportunities.  We consider the tax impacts throughout the year when making investment decisions for clients, but especially as we get into the fourth quarter. And though the benchmarks we cover for our newsletter are mostly positive for the year, the challenging investment environment in the third quarter may have produced tax-loss harvesting opportunities for clients with taxable accounts.  Though we hate losing, tax-loss harvesting may provide an opportunity to lessen any pain and may actually provide a benefit, as we continue working on keeping emotional biases outside of actions we take.

A Global Perspective

A core objective for our customized Baron Financial Group investment strategies is global diversification.  Global diversification means including investments based both domestically in the U.S., as well as internationally in developed and developing countries.  There are popular benchmark indexes that provide perspectives about the performance of global investments.

For equities, we monitor the MSCI ACWI All Cap Index.  This index represents equity investments across 23 developed and 24 emerging markets.  The index was down 3.41% in the third quarter, driving year-to-date (YTD) performance lower to 9.29%.   Global equity performance took a pause from mostly positive momentum so far this year.  Concerns about inflation, interest rates, and geopolitical risks are not new, and these concerns do not seem to be going away any time soon.

For fixed income, or bonds, we track the FTSE World Government Bond Index.  The index tracks sovereign debt from 20 countries, denominated in their respective currencies.  It was down 4.27% in the third quarter, causing YTD performance to turn negative, down 2.68%.  Global bonds are facing headwinds, as many developed countries are fighting inflation by raising interest rates, which can negatively impact bond performance.  

U.S. Economy

Economic growth and the labor market remain positive, but higher interest rates continue, and though inflation is lower, it has not gone away.  Additionally, there are a lot of smaller scale economic data points that are not positive.  We think that as long as the labor market remains solid, though, the overall economy will remain relatively stable.

The Bureau of Economic Analysis (BEA) announced in its third estimate for the second quarter of 2023 that real Gross Domestic Product (GDP) increased at an annual rate of 2.1% (the full press release can be found at https://www.bea.gov). This was the fourth quarter in a row of positive economic growth.

Due to the normal delay in receiving growth data from the BEA, the Federal Reserve Bank of Atlanta publishes a “nowcast” by estimating GDP growth for the most recent quarter (in this case the third quarter of 2023) using an approach like the BEA.  On October 10, 2023, the estimate for third quarter GDP from the Federal Reserve Bank of Atlanta was positive 5.1%.  Note that this estimate is updated regularly and is subject to change.  The “nowcast,” along with the methodology, and additional information can be found at: https://www.atlantafed.org/cqer/research/gdpnow.

Job growth remains strong.  According to the Bureau of Labor Statistics (BLS), the U.S. gained 336,000 jobs for the month of September, and the unemployment rate remained below 4%, at 3.8%.  BLS indicated job growth was notable in leisure and hospitality; government; health care; professional, scientific, and technical services; and social assistance (full press release can be found at:  https://www.bls.gov).

U.S. Stocks

The S&P 500, an index consisting of roughly 500 of the largest U.S. domestic stocks, was down 3.27% in the third quarter. YTD performance remained positive, finishing at 13.07%.  Companies in energy were the bright spot in the quarter, benefiting from the rise in oil prices.  Utilities and consumer-based companies were some of the biggest distractors in performance.  For technical analysts and trend followers, the index remained above the 200-day moving average during the entire quarter but closed the quarter below the 50-day moving average.

Dividing index components into growth and value, growth-focused stocks continue to outperform in 2023, after trailing value in 2022.

International Stocks

International developed country equities (such as those in the European Union), measured by the MSCI EAFE index was down 4.11% in the third quarter but still positive 7.08% YTD.  Non-developed, or emerging countries measured by the MSCI EM index, was down 2.93% for the quarter, but still up 1.82% for the year.  Some economies outside the U.S are experiencing similar inflation and interest-rate challenges as the U.S.  Plus, geo-political risks seem to be increasing as conflicts around the globe intensify.  Considering these factors and possibly others, international developed stocks underperformed the S&P 500 in the current quarter, as well as YTD.  Prior to performance in 2022, the last time international stocks finished ahead of U.S. stocks was in 2017.  


U.S. Domestic Fixed Income (bonds), as measured by the Barclays U.S. Aggregate Bond Index, was down 3.23% in the third quarter, dropping into negative territory for the year to negative 1.21%.  The index gauges the performance of investment-grade intermediate bonds.  The continued presence of inflation and expectations for lingering higher interest rates increased.  This caused longer-term interest rates to go higher and drove negative results.

The 10-year U.S. Treasury bond yield was at 4.59% at the end of the third quarter, much higher than 3.81% on June 30th, and 3.88% to start the year.

If you plot interest rates versus the time-to-maturity to earn those rates, you have created a yield curve. We continue to monitor the changing shape of the yield curve for U.S. debt issues, and what that may signal.  Using the U.S. Government 2-year bond rate as a proxy for short-term rates and the 10-year U.S. Government bond rate as a proxy for long-term rates, we calculate the difference between the rates, which provides a possible indicator for the future direction of the economy.  A steep spread (long-term rates higher than short-term rates) indicates potential future economic expansion and fixed-income investors are compensated for taking longer-term risk.  A flat spread (long-term rates match short-term rates) is a possible indicator of economic uncertainty and longer-term investors are not being compensated for investing in longer-dated securities.  An inverted spread (short-term rates are higher than long-term rates) possibly indicates future economic contraction.

The third quarter finished with the 2-year at 5.03% (and 10-year at 4.59%, per above), keeping the yield curve inverted at 44 basis points (a basis point represents 1/100 of 1%).  But much flatter than the end of the second quarter when the spread was 106 basis points. 

The flattening of the yield curve during the third quarter may suggest that bond investors remain uncertain about future economic growth but may be less concerned about higher interest rates having an immediate negative impact on growth.

Housing and Real Estate

Commercial real estate, as measured by the FTSE NAREIT All Equity REIT (Real Estate Investment Trust) Index, got hit hard during the third quarter and was down 8.33%.  YTD the index is now down 5.61%.  There is a lot of negative news about commercial real estate due to rising rates, banking issues and increased vacancies as work-from-home policies continue.  Commercial real estate is heavily reliant on debt as a business.  Any stresses in the financial industry can impact the important funding that the industry relies on.  The good news is that the concerns are not much of a secret.

According to Freddie Mac (FM), the average 30-year residential home mortgage rate has moved higher, recently reported at 7.57%, near 23-year highs.

Natural Resources

The Bloomberg Commodity Index (BCOM) was the only positive performing index we cover for the third quarter.  The index was up 4.71%, helped by increases in oil and gas prices.  The index remains down YTD at negative 3.44%.   After being the only positive performing index in 2022, increases in commodity prices overall have retreated in 2023, but this quarter’s performance reminds us that inflation is not going away.    

Baron Client Strategies

Planning for multiple outcomes with Your Personal EconomySM is critical to helping our clients answer the simple question "Am I going to be OK?".

As clients know, we are fiduciaries and operate as fee-only advisors, so there is no benefit to us for making investment transactions.  The reasons your Baron team makes trades are to align clients' portfolios with their customized, risk-appropriate globally-diversified strategy.  Also, we believe the actions we take are potentially strengthening the clients' portfolios or financial positions.  We use this same approach with our own personal money.

Going into the fourth quarter, you may notice trading activity pick up.  As discussed, tax-loss harvesting, or tax-trading, intensifies during the fourth quarter, as time to take advantage of opportunities shrinks.  Also, our investment committee has approved changes to investment choices in our alternative asset selections.  Expect to see changes over the next few months in client portfolios with exposure to that asset class.

No matter the economic environment, our basic principles remain:

Create a globally-diversified and risk-appropriate strategy.  Validate the investment choices versus peer investments. Rebalance when needed. Test the strategy in a comprehensive financial plan and obtain regular feedback to update information and advance your financial position.

Your Service Plan

One of our primary roles is to educate our clients to make informed decisions about reaching their goals.  Critical to that process are plan reviews, a process that focuses our attention on your goals, takes account of any changes in your situation and allows us to alter the course, as necessary. If you have had any changes to your financial position or are considering changing financial goals and objectives, please let us know.

Your Personal EconomySM

You may have heard us say that we are happy to help clients with issues outside of investing that may have an impact on their financial lives.  We say things like “Lean on us when you are making a decision with anything with a dollar sign involved.”  So, we have been including this section as a reminder of all our services and to share ways in which we can help clients outside of investing.  

It is that time of year again.  Are you approaching or already Medicare age?  For those 65 or older, registering for Medicare can be confusing and stressful.  Don't attempt to figure it out yourself.  Lean on Baron as a resource to help with the decision-making.  We invite our clients and their family members to work with a Medicare expert to make sure both coverage and costs are optimized.  Remember, the program is not a set-it and forget-it plan. Reviewing annually is especially important, so make sure you are using your Baron resources to the fullest.  The period for Medicare’s Annual Enrollment for 2024 coverage runs from October 15, 2023, through December 7, 2023.  For more information, visit our website blog about Medicare’s Annual Enrollment.

As always, it is important to share updates on your financial lives with us.  If you would like to update your plan or just get started, please reach out to us to discuss Your Personal EconomySM.

Concluding Comments

Unfortunately, there is no reward without risk and losing is part of investing.  You do not have to like it, but it should not impact your decision-making.  Avoiding negative impacts from biases, like loss aversion, can help improve chances for financial success for you and Your Personal EconomySM.

Baron Updates  

October is a noteworthy month. In addition to the start of Medicare’s Annual Open Enrollment, (mentioned earlier), it is also Cybersecurity Awareness Month and Financial Planning Month, two areas that we focus on.  Look for James’s Baron Financial Answers video on Financial Planning, which will be available soon.  We have several Cybersecurity informational videos available on our website blog, as well as other educational content. The Baron Advisors are often called upon by journalists for their insights on financial planning and investing. They are quoted in such prestigious media outlets as The New York Times, CNBC.com, and NJMoneyHelp.com, among others.  Please contact us if you have any questions.

Remember that you can also visit our website to gain access to your client portal.  Just click on the client-portal tab, which will allow you to view your account information. The client login requires a username and password to gain access to the portal. Please let us know if you would like to create your portal login or if you would like to learn more about what the portal provides, including paperless statements. Contact Baron at 1-866-333-6659 or at info@baron-financial.com to enroll.

For our clients and friends, we hope you enjoyed our recent Client Appreciation Event in New Jersey.  It is always a pleasure to see you!  We look forward to hosting a Client Appreciation Spring Training Baseball game event in Sarasota, Florida on March 2, 2024 – please save the date.

As we do every holiday season, we will continue our support for the food pantries in Fair Lawn and Sarasota, in hopes that we can ease the burden for those who are less fortunate.

We would like to end with our heartfelt congratulations to Donna and Victor Cannillo on being honored at this year’s Spectrum for Living Gala.  A well-deserved honor, Donna and Victor have been involved with Spectrum for Living for almost 40 years.  Spectrum’s vision of a community of respect, equality, and dignity for people of all abilities has always resonated with them. Spectrum is a New Jersey not-for-profit organization, serving people with developmental disabilities. To learn more about Spectrum for Living, click here.

We hope you have a healthy and happy holiday season!

Warmest Regards,

 Baron Financial Group, LLC

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of October 13, 2023 and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Baron Financial Group to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client or prospective client’s investment portfolio. Historical performance results for investment indices and/or categories generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. Inclusion of index information is not intended to suggest that its performance is equivalent or similar to that of the historical investments whose returns are presented or that investment with our firm is an absolute alternative to investments in the index (if such investment were possible). Investors should be aware that the referenced benchmark funds may have a different composition, volatility, risk, investment philosophy, holding times, and/or other investment-related factors that may affect the benchmark funds’ ultimate performance results. Therefore, an investor’s individual results may vary significantly from the benchmark’s performance.