Kovitz Newsletter 3Q23



In the complex world of global financial markets, there is no three-month period that could accurately be described as quiet. Billions of people wake up every morning and go about their business. Our business – the sum total of our interactions – is to protect and grow our clients’ wealth amidst this ever-changing mosaic of intersecting data and events. To that end, this past quarter was cast with an eerie calm as we collectively waited to observe the impact of events that were set in motion earlier in the year.

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So far, 2023 has confounded economists and market forecasters alike as the U.S. economy has shown surprising resilience in the face of the Federal Reserve’s engineered rate increases to combat inflation. Despite a late-quarter sell-off, in what has historically been a seasonally weak period for equities, investors have been rewarded for staying the course.

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From the perspective of a fixed income investor, the bond market today no longer resembles the post-Global Financial Crisis norm, where monetary policy was driven by sluggish economic growth instead of inflation concerns. In contrast to the decade following the 2008 Financial Crisis, bond investors are once again wary of inflation risk and are demanding a meaningful return on top of expected inflation to compensate for that risk. This "real" return now exceeds 2%, a notable increase from the negative 2% seen in 2021. This means that bond investors can once again grow wealth after accounting for inflation. While the "higher for longer" scenario may be a concern for borrowers, it presents genuine opportunities for lenders.

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