September Market Update: A Look Back & A Look Ahead

In the September investment edition of the Wealthy Behavior podcast, I talk once again to Heritage’s Chief Investment Officer, Bob Weisse, about the markets, economy, and the things investors need to know now.

Despite ample reasons to be concerned and alarming headlines, the markets have remained resilient. We discussed this and more, specifically:

  • Year-to-date market results and expectations
  • What investors should look for when bond yields creep higher
  • The latest economic data released on the labor market
  • What Bob and the investment team will be busy with this fall
  • Asset allocation – How the team determines the right allocation from ~20 asset classes
  • Grading the Fed
  • Residential and commercial real estate update
  • And a sneak peek into our next episode on bonds and mortgages

We’d love to hear from you! Email us questions, ideas, or feedback at

Edited transcript below.

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September Market Update: A Look Back & A Look Ahead

Available through the link in title and wherever you get your podcasts


Welcome to Wealthy Behavior, talking money and wealth with Heritage Financial, the podcast that digs into the topics, strategies and behaviors that help busy and successful people build and protect their personal wealth. I’m your host, Sammy Azzouz, the president and CEO of Heritage Financial, a Boston based wealth management firm working with high net worth families across the country for longer than 25 years. Now let’s talk about the wealthy behaviors that are key to a rich life.

Welcome to the September edition of the Wealthy Behavior podcast, where I talk to our chief investment officer, Bob Weisse, about what’s going on in the markets right now and things that you should know going forward as investors.

Bob, how was your summer?
It was great. You know, hearing summer in the past tense is a little sad. It was nice, but, you know, fall is going to be busy and it was a nice summer.

What are you going to be busy with this fall?
Just back to school stuff with the kids in school and all their activities, which they basically head off in the summer.

How about from an investment standpoint, what are you guys looking at and what do you want to accomplish before your end?
Yeah, a lot of projects going on, probably the biggest is looking into 2024. So capital market assumptions and thinking about any portfolio changes as we restructure portfolios based on our outlook. And then there’s some travel to some conferences. Fall is a popular time of year for investment conferences. So I’ll be traveling a little bit, have a conference in September, two in September and then one in October. So that’ll be keeping me busy as well.

What do you get out of those conferences, Bob?
A combination of the content, what you’re really supposed to go there for, where you see quality people up there presenting good ideas and you get some nuggets. But there’s also value, in my opinion, in the networking where you’re sitting with industry peers, like-minded individuals and talking in between sessions. What do you think about that? And what are you guys doing? What are other people around the country who are in a similar seat? And typically you add all that up and in a conference you’ll get a few good takeaways.

Awesome. So you talked a little bit about capital market assumptions for 2024. That’s a topic we’ve covered on the podcast. But maybe as a quick reminder, what are capital market assumptions? What do they do for you and how do they lead to portfolio implications for investors? And maybe just a little bit of a preview of if you think things have changed this year from your expectations going forward.
Yeah. So capital market assumptions or the acronym commonly used is CMAs. Those are the assumptions that you are applying to asset classes, specifically risk and return. So for example, what are you expecting for return from US stocks and what’s the level of risk in US stocks? And then you go through every asset class. So US stocks, international stocks, emerging market stocks, different types of bonds, alternatives, et cetera.

How many asset classes?
About 20. So there’s a pretty big list that we use. And I mean, it’s kind of like baking, building a portfolio. You’ve got all your ingredients and you build out the characteristics and you put it together to get the right portfolio. So the inputs matter a ton. It’s a big process. As far as what it’ll look like, my initial reaction was I’m not going to answer that, but I’ll answer it because we have seen interest rates go up this year a little more. So last year was a big change in interest rates and they’ve continued to increase a little bit this year. Fortunately, they went up enough last year that the yield has been bigger than the offset in price from the additional increase. But nonetheless, looking into 2024 and beyond, one change that I think we could expect would be higher bond expected returns.

Even higher than the beginning of 2023?
Yeah, because yields are higher. On the equity side, equities have overachieved this year. US markets are up 18%. So that might bring down the expected return in equities when they come off such a strong year. Probably not too material, but we might see a slight tick up in bonds, slight tick down in stocks.

So that gets us to a debate that you and I had offline as you were helping me with a blog post about higher yields and what does that mean and how investors process higher yields and whether that’s a threat competitively to people’s desire to buy stocks. But before we get to the debate, maybe walk us through the baseline assumption that when yields are higher, this means X for stocks. When yields are lower, this means Y.
Yeah, so the 10 -year Treasury is the commonly cited bond measure when people talk about yields and the 10-year Treasury yields around four and a quarter right now. And to put in context, it touched around three and a quarter in early April this year. So since April, we’ve seen about a 1% increase in the yield. And a good part of that’s been more in the last couple months. Some people talk about that and say that rising yields and bonds is…I guess a way to put it is stocks compete with bonds. So investors choose, they have money and they want to invest and they look, should I buy real estate? Should I buy stocks? Should I buy bonds? And when bond yields are higher, investors should require a higher return from stocks. If you use extremes, if bonds yield 2%, then you might be happy with 7% in stocks. If bonds yield 7%, you shouldn’t buy stocks. So there’s what’s called the equity risk premium, which is the spread you get over the risk-free rate for investing in stocks over bonds. And typically it’s 4 to 6 % and that’s something you should see to take the risk to invest in stocks. So when bond yields go up, which we’ve seen, that can lead to stock prices going down if investors are acting rationally.

And my pushback on that was I’ve seen a lot of good investment approaches in my lifetime, asset allocation approaches… I shouldn’t say lifetime, but in my career. I wasn’t really looking at this in elementary school. And the idea that investors directly determine their stock market exposure using the 10 -year treasury can be overblown. I feel like investors either have static allocations, and they’re not very tactical or they use what opportunities they see in the stock market to determine their stock market exposure. So you could back into seeing fewer stock opportunities because yields are higher. Whether you’re using a discounted cashflow model or some other things, you’re ending up with less attractive investment opportunities in equities. But I feel like that’s more done at the margins and it’s not, oh boy, the ten-year yield is 6% so we really want our equities not to be 65%, we want them to be 58%.
Yeah, I think that’s right. It’s done at the margins. Most people will have a range where they’ll be in stocks. And like you said, could be a target of 60 and they’ll be plus or minus 5%, but they’re not going to change dramatically based on it.

But you’re saying the combination of two things, slightly lower return expectations, potentially for US stocks, given their valuations and how well they’ve done, and higher yields on fixed income may lead to some adjustments in the mix between the two.
That’s right.

Okay. What are other asset classes? I know you said, there’s 20 or so in the CMAs. You don’t allocate to all 20. So what typically knocks out an asset class from being included in a portfolio?
We look at risk, return, and correlations as the main data points. An example of something that we haven’t allocated to that would fit in there are commodity future contracts. Commodity futures, that’s like if you want to invest in the price of corn and wheat and oil. The reason why we have not is the volatility of commodities is higher than stocks and the expected return is about inflation. So your return is bonds or lower. Your risk is stocks or higher. And then the correlation is pretty high to stocks on average over time. So when the economy is good, typically inflation is higher, and stocks are doing well. When the economy is bad, typically in deflationary environments, commodities are going down. So you add all that up and you say, I don’t really see the point of including this asset class in the portfolio. We have the data, we look at it. One other point to end this is we think there’s better ways to get exposure to those assets through owning farmland, infrastructure, timberland investments, like own the farm, not the futures on corn. So we still get the exposure just in a way that generates cashflow. That’s one example of something that’s in there. Another, to give you one more is emerging market debt. We’ve looked at it and we may allocate to in the future, but to date we have not. And the main reason is we have exposure to emerging markets through equities. We have a healthy emerging market equity exposure and we’d have to cut that back to increase emerging market debt. And at the same time, emerging market debt, those are bonds. And we’ve tried to have more of a view that let your bonds be your bonds and that’s your safe money. And when things get ugly, you want your bonds to hold up and emerging market are a pretty risky spot in the bond market. So while there the portfolio statistics actually look a little better, a little more compelling, you again, get to the correlation, it’s closer to equity than bonds frequently, because when things go bad, emerging markets can sell off even the bonds. So those are some of the considerations.

So to use your recipe analogy, those asset classes are like parsley. They’re basically adding nothing to the portfolio at best, unless you’re a huge parsley fan. I did not mean to offend.
Yeah. When I make my Bolognese sauce, I typically cheap out and skip the parsley.

Yeah, there you go. All right. So we jumped into it a little bit in terms of how the bond market has moved. We saw some sharp yield changes in August, but how’s the market been doing year to date? What did investors miss if they weren’t paying attention last month?
Yeah. Markets have done great. So I’ll just run through some numbers. Looking at the US total market, Russell 3000 year to date, up about 18%, the last month down two, last three months up eight and a half percent. So just really strong year for the US stock market. And I don’t think we’ve even seen a 10 % pullback this year. So despite a lot of headlines that have been concerning and reasons to be concerned, it’s been a strong year. Overseas, also strong, just not as strong. Developed international equity up about 10 and a half percent. That’s the MSCI world ex-US. Last one month down about four. So strong year, up 10 and a half there. Emerging markets, the worst of these three regions, year to date up about four and a half percent and the last month down six. So they were up 10 and gave back about 6 % in the last month. And then looking at bonds, bonds are up about 1.4 % year to date. And the last month they gave back about 64 basis points. So the Bloomberg US aggregate is down 64 basis points over the last month. It was up about two. Now it’s up about 1.37. Decent return for bonds, not quite collecting the yields because yields have risen, which has led to a price decline, but the yield’s been strong enough to offset the price decline in the face of rising yields. And then maybe just looking at real estate, which we could talk about too a little bit. REITs are interesting. Last year, 2022, they were down 24%. This year they’re up about 5%. So we’re seeing the publicly traded real estate market perform. Private real estate is down in the single digits here today.

And why is that, Bob? Is that partially because publicly traded REITs trade more in line with the stock market than you would expect as a real estate investor?
Yeah. So with real estate, it’s interesting. In private real estate, they just don’t do as good a pricing as the public market does. The public market’s forward-looking. So like last year, public markets in real estate sold off, with higher interest rates as one of the main reasons, maybe seeing that inflation would be slowing. But the private real estate market was up last year. And we were questioning that and saying, is it really up? But now this year, it’s turning a little bit. And you saw the same thing back in the 07-09 period. If you think back then for listeners who maybe weren’t in the markets, 2008 was a very negative year for the stock market. And then it bottomed in March of 2009 and 2009 ended up being a good year as markets bottomed in March and rallied for the remainder of the year. So stocks were down in 08, up in 09. Private real estate was up in 08 and down in 09. So it lagged by a year and we’re seeing the same thing again this year.

Understood. So the other thing that investors may have missed in August was the Jackson Hole meeting and Chairman Powell’s speech there. I know you didn’t miss it. What were your takeaways?
Yeah. So Jackson Hole, it’s an economic summit in Jackson Hole, Wyoming, and a three-day meeting. And the chairman of the Fed typically gives a speech. And last year, stocks went down about 20 % after Powell’s speech. And he introduced, I think the phrase, economic pain is coming. It was a pretty negative speech. He talked about job market imbalances, labor market imbalances. And it’s like, we’re going to increase rates and we’re going to hit the economy to stop inflation no matter what, and it’s not going to be fun. So look out. And markets went down. So coming off that conference last year, I was like, oh boy, here we go again. What’s he going to say? And I think the setup’s different with data that’s come out, but also I think he did not want to send markets down by 20%. So it was pretty much a non-event. He didn’t really say anything new. And I think his goal probably was to do no harm in either direction. If stocks go up 10% after the speech, that’s not a success in his opinion either. So it turned out to be basically a non -event. And just connecting that to why the setup was a little different this time is we’ve received some more economic data that came out last week. And last year, we talked about the labor market imbalances that he was talking about. And the number that they were looking at was the ratio of job openings divided by unemployed people or people looking for work. And last year it was over two, it was up to 2.1. There were 2.1 jobs for every one person looking for work. So if you think about it, if you’re looking to, I don’t know, be a cook in a kitchen, there are two restaurants with that job and you can negotiate between the two. Well, how much are you going to pay me? How much are you going to pay me? Well, the guy across the street is saying this, and you have pretty good leverage and that leads to wage inflation. And then other people at the office find out how much you’re making and they get raises and that leads to an inflationary spiral. That’s imbalance in the labor markets. So that ratio had been around two for a good part of last year. Last week, we received improving data on both parts of that equation. More people entered the labor market. The unemployment rate went up from three and a half percent to 3.8%. More people are looking for work, which is great because you got all those help wanted signs out there. And meanwhile, job openings have continued to decline. It was up to 12 million and now job openings are down from 12 million down to 8 .8 million. So it didn’t go from 12 to 8.8 in a month, but it’s been steadily declining. So that ratio is now 1.38 jobs for every one person looking for a job. Healthy is one to 1 .2. So that was a long -winded answer, but the point is Powell didn’t need to be as scary this meeting because things are improving on that front.

We haven’t had an inflation reading in a while that we haven’t addressed through the podcast, so we can skip that maybe for now, but where are you on recession watch, soft landing, pick any other buzzword that you want to utilize or phrase?
Yeah. I mean, on recession watch, the leading economic indicators that had a kind of a perfect track record have never gone pointing or calling for a recession without one happening as long as they’ve gone now. So I’d say that that signal is TBD and the soft landing may be happening. We’re seeing the conditions that the fed would like to see. So we’re staying the course and not making investment decisions based on trying to call a recession in the next six months or so.

And what is it that the Fed wants to see, Bob, more balance in the labor market, moderating inflation, anything else?
I mean, their dual mandate is healthy labor market and price stability. So it’s really the focus on inflation getting down to two and it’s in the three to four range right now. So they’re almost there. There are some headwinds still, but things are looking better, especially in the labor market front.

People were very hard on the Fed and Powell the last year, two years, which is typical, I think with most Fed chairs. If we end up in a quote unquote soft landing and we get progress on inflation and continue the path we’re on, what will be your overall grade for the Fed and for Powell?
Yeah, I don’t think you can ever get a pass for a transitory inflation and just being so dismissive of it back in 2021 when the economy was just on fire with all the stimulus and just to make nothing of it and then do a 180. But that being said, if he pulls off the soft landing, which for our listeners is basically solving high inflation without causing a recession, which has never been done before by a Fed chairman, you got to hand it to him on that front.

Why would you not give him a pass on transitory? I guess it depends on what your definition of transitory is. But if inflation, let’s say if 3% or lower is where we are going to be, even though he may have been wrong about the Fed not having to do anything to combat inflation, didn’t it ultimately prove transitory and less persistent than his critics were fearing?
So I think there’s an element of saying, oh, in the end, you were right. It was transitory all along. We’re just not patient enough to let it play out. But he could have acted sooner, for example, not buying mortgages when the housing market was red hot. So I think it’s a little bit of a, you get a cut and he could have just washed it and put Neosporin on and been fine. But instead I told you to do nothing. Then you end up in the ER and yes, I saved an amputation in the ER by doing some miraculous procedure. It’s like that shouldn’t have been necessary. You could have done it with simple hot water soap and a band aid by being less stimulative early on, a little more restrictive even early on and a smoother ride rather than pump the gas slam the break. That’s not healthy for anyone.

And I agree with that. And I’ve watched three Fed chairs in my professional career. And I don’t think any of them, just like I don’t think anybody else can, can predict the economy, which is why we always talk about don’t make changes to your portfolio based on your macro view. You can’t do it. All the last three, they don’t anticipate what’s going on. And early on, their assessments are actually inaccurate about what’s going on, but they ultimately end up solving the problem. So I feel like if you grade him on a curve, he’s no different. Oh, I guess it’s four Fed chairs. He’s no different than the prior four. But if you’re grading him on the ability to have a great crystal ball, I don’t think anybody has one.
I mean, that’s a good comparison. You look at Greenspan, yeah, Bernanke.

Yellen kind of had a… Uneventful, maybe? Yeah. Greenspan had the tech bubble. Bernanke had the financial crisis. And then Powell, who dealt with this inflationary period, and you’re right, all three of them just missed it. But then now you’re dealt this hand and it’s evident and they got us out of it. Stacks up on par, I suppose, with those.

Anyway, I guess I’m not a big Fed basher. I don’t think that they can see anything that other people can’t, but they tend to fix stuff after the fact. You can bash them if you want.
Everyone and his or her uncle knew inflation was high in 2021. And just to have your head in the sand when your job is two things, price stability and labor and inflation’s through the roof and you’re not doing anything, you’re actually doing the opposite. You’re putting gas on the fire. You’re buying back mortgages in 2021 when the housing market was on fire. It just seems a little ridiculous.

I agree with that. And I think in Bernanke’s time, they were worried about inflation way too late into the stuff that had started bubbling into the great financial crisis and they weren’t willing to cut rates. That was Cramer’s famous rant, right? They know nothing. That was basically the Fed was so late to the game. Anyway, we don’t need to grade the Fed any longer. You talked about employment report, the JOLTS report, the impact of that. You also wanted to chat a little bit about housing because surprisingly it’s still up, but maybe for quirky reasons, although you and I may disagree about that.
Yeah. Housing, I mean, it’s a common question we get from clients too. So it’s something that’s good to cover and is interesting. Case Shiller, the 20 city composite reading for July came in at a 92 basis point increase for the month, .92%. And then there’s also a Shiller US national home price index which is up 65 basis points, .65 % for the month of June. So pretty big increases for one month of home prices. And to put it in context, this is the fourth or fifth month in a row of pretty healthy increases following a seven to eight month period of a decline in prices. So the residential market definitely appears to be strong. The caveat is it’s on low volume. So there’s fewer listings, so low inventory, fewer transactions, low volume. When you compare this year to any of prior five or six years, it’s like 15, 20% below average. So you have fewer people listing their houses for sale, presumably because most people have a two, three, 4 % mortgage. And the idea of moving to then take out a % mortgage isn’t attractive. So people are staying put, but the houses that are transacting are doing so at pretty high valuations, it seems. And so that’s inflationary. So just something to keep an eye on.

Yeah. And for those curious, because it has been a fascinating conversation lately in terms of why are mortgage rates where they are, where could they be going, our next podcast episode will have somebody who focuses on fixed income, mortgage backed securities, the mortgage market to help us sort it out. Where you and I maybe differ a little bit on real estate, because I do see it as prices are still strong on lower volume because there’s just not a lot of listings, which you touched on with where mortgage rates are. I feel like if mortgage rates back down, more people would list and prices would soften. But what do I know? Like, again, if the Fed doesn’t have a good crystal ball, neither do I. But lower rates, if higher rates are keeping people from listing, lower rates should drive more activity. And then maybe you get some equilibrium between sellers and buyers.
It’d be interesting to see, and I’d be interested to hear Ken’s thoughts on that, our next guest. Looking forward to hearing that one.

So interesting to see. Is that your polite way of saying, I don’t think you’re right, Sammy?
It’s a tough one. I really don’t know. I can see both sides. I mean, the argument that I’d make against it is if there’s lower rates, the person who is going to sell their home to move, and they’re in the market as a seller and a buyer and probably buying a bigger home, and therefore that’s adding, it’s a net zero effect or even effect on the strengthening demand side, as opposed to it’s the people who have, say, two homes and are just like, okay, I’m giving up on my vacation house. That’s when prices come down. When you go from say two to one or someone passes away and they’re not coming into the market as a buyer as well. So if someone’s coming into the market, both as a seller and a buyer, that probably should not have much of a net effect. And that’s, I feel like what lower rates would do. It would be people coming in as sellers and buyers. So you’d have more transactions, but I don’t know that the net effect would be that significant.

So you’re saying the equilibrium would be maintained. It’s a good point. That’s why we don’t know and we don’t invest based on our thinking that we do know where it’s going, but it will be an interesting conversation. Mortgage rates are elevated. They’re based, I think, on yields and then a spread over a yield like the 10-year treasury. And even that spread is elevated right now. So I am curious to learn a little bit more about why and maybe give our listeners some perspective on when and how, what would happen to allow mortgage rates to back down a little bit. Did you have anything you wanted to touch on, Bob, on commercial real estate?
Yeah. On the commercial real estate front, I thought it’d be worth talking about a little bit since we do have investments in that area. And it’s been an FAQ from clients over the last couple of years, really, people like to talk about it. You can split commercial real estate into two parts, one that’s very strong, then one that’s a little weaker. So in the strength area, multifamily is a big sector in commercial real estate. So that’s like apartments. And when you think about what we just talked about with home ownership, affordability being tough and housing prices being high, mortgage rates, apartments have done well. People have to live somewhere. So there’s been strong demand for apartments. That’s done well. And another area of commercial that’s done well is industrial. So industrial think like big warehouses for e-commerce. E -commerce is doing great. That’s not going away. And then also data centers and life sciences. So those are all areas in commercial real estate that are doing well. On the softer side, office is a mixed story. If you look, say, in major cities like Boston, downtown high-quality buildings like the Prudential Center, I think those buildings, they’re doing fine. They will be okay. One of the tenants in the Prudential Center is a big law firm and they just told their lawyers, you have to be in person four days a week now. There was a three-day policy and now it’s a four-day policy. Clients expect to see you, even if it’s a Zoom, they want to see the office in the background, not a fake screen and not your kitchen. So you see that demand. It’s more in the suburbs, I’d say, or lower tier markets, more rural markets, smaller office buildings. And that’s the stuff that we don’t invest in. It’s smaller scale. That’s things that clients might own personally, buildings that might just cost a couple million dollars, something like that. And that’s where you’ll see the weakness because you just don’t have the big employers and the scene to drive people as much to work. And then retail is also mixed. And then you add it all up. And one thing that is difficult for real estate is interest rates. So the story used to be in real estate that you’d buy properties that would yield 4%, 5%, and you’d finance it at 3%, 4%. And there’s a spread on that. So you’re applying leverage to a pretty good, what’s called a cap rate, the yield on real estate. And you’re leveraging that and you get a good return now because valuations haven’t moved much. I said they went up last year and they’re down a little bit this year, but they basically haven’t moved much. They’re still yielding around 4 % to 5%. But financing, if you’re taking out new financing, 7%, 8%, the leverage doesn’t work on the yield. So that’s where we’re a little concerned that as you see transactions take place, if an investor’s buying a building, financing it at 7 % or 8%, they’re not going to underwrite that if it’s only yielding 4 % because that’s tough. You need a lot of appreciation to cover the cost of debt there. So we’ve pulled back in commercial real estate in areas where there have been liquidity in the portfolio with the exception of REITs where we think that was all priced in last year. REITs are up this year.

Got it. Great. Thank you, Bob, for that overview. It looks like we were able to touch on multiple asset classes today, including commodities futures, which we’ve never discussed before. Any last takeaways for listeners who are looking to get some either planning or portfolio checkup items done between now and the end of the year?
Nothing comes to mind. I’m excited about the upcoming podcast with Ken. And you’ve done some other good ones recently, too, that I’ve listened to. Gabby from JP Morgan, I thought she was great. You talked about investing in China and just things going on with China.

Yes, you either hear that it’s a big competitive threat or that it’s slowing down and it’s day in the sun are over. That’s an exaggeration, but she was able to give a lot of great perspective. So yeah, no, I appreciate that, Bob. I appreciate you coming on every month. I get a lot of people who reach out and say how much they enjoy it. So without further ado, thanks for sharing your insight today, Bob. Talk to you later.
Thanks, Sammy.

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