Navigating Market Challenges, Interest Rates, and the Rise of AI

Navigating Market Challenges, Interest Rates, and the Rise of AI

In our latest third quarter reflections webinar, Co-Chief Investment Officers Lindsey Woodward and Matt Rivera explore market performance in Q3 2023, energy sector fluctuations, the impact of Artificial Intelligence, interest rates, and the significance of rebalancing your portfolio.

A History of Markets Through Difficult Times

There are many challenging and heartbreaking realities in the world. While Abacus’ focus is primarily through a financial lens, we never want to minimize or forget the genuine suffering so many of our fellow humans endure. The way we tideway investing continues to be as mindful as possible to help effect as much positive transpiration in the world that we can realistically bring.

Peering through that financial lens then, the markets are often marked by uncertainty and the headlines can indeed be intimidating. In today’s world, it’s easy to finger wondering well-nigh both global events and your investment portfolio. In these moments, it’s crucial to remember that history has shown us that despite short-term turmoil, the markets have historically rewarded systematic, long-term investment strategies.

Consider the timeline in Walkout 1 that spans from 1970 to the end of 2022. It paints a picture of the market’s resilience throughout various crises, such as the Y2K scare, Hurricane Katrina, and multiple wars. Plane in the squatter of such adversities, the market unfurled to grow, rewarding investors who remained single-minded to their investment strategies.

Chart showing markets through difficult times

Exhibit 1: Growth of the U.S Dollar from 1970-2022. From Dimensional Fund Advisors LP in US Dollars. MSCI data 2022.

This historical perspective serves as a reminder that while the current times may be challenging and anxiety-inducing, history teaches us that staying invested during turbulent periods can lead to long-term financial success. 

Q2 Navigating Market Challenges

The third quarter of 2023 presented several challenges for the stock market. Across the board, stock indices experienced declines. This ripen is notable when we examine the performance of variegated windfall classes during the quarter.

In the U.S., large-cap stocks fared largest compared to small-cap stocks, while value stocks showed a marginal outperformance versus growth stocks. However, these percentages did not reflect the full picture of the past year.

Exhibit 2: Stock market performance for Q3 2023 and 1 year as of 9/30/2023. eVestment.

When considering the performance over the past year, the narrative changes. Large growth companies – largely due to the “Magnificent Seven” – led the way in the U.S. stock market, outperforming their value counterparts. Interestingly, this trend is the opposite outside the U.S., emphasizing the importance of diversification in an investment portfolio.

Despite the challenging third quarter, the last year has demonstrated robust performance in the markets, highlighting the long-term benefits of a well-diversified portfolio.

Q3 and Year-to-Date Yoke Market Review

During Q3, the Federal Reserve raised interest rates in July to a 22-year upper range of 5.25% to 5.5%. In September, rates remained steady, but the yoke market was not immune to these changes.

The Bloomberg U.S. Aggregate Yoke Index returned -2.54% in September and -3.23% for the third quarter. This ripen illustrates the sensitivity of yoke prices to interest rate fluctuations.

Exhibit 3:“Quarterly yoke market performance for Q3 2023. Dimensional Fund Advisors. 7/1/2023 1 to 8/30/2023.

As depicted in Walkout 4, the past 15 years have been characterized by historically low interest rates pursuit the Great Recession. Currently, rates are moving closer to their long-term averages. While rising rates can be a hindrance for borrowers, long-term investors in the yoke market can find opportunities, plane if they wits short-term pains.

Interest rates over time

Exhibit 4: Market yield on US treasury securities at 5 year unvarying maturity. Federal Reserve Economic Data.

Bond prices waif with rising interest rates due to a concept known as opportunity cost.  However, in rising rate environments bonds, expressly those held slantingly thousands of others in diversified bilateral funds, indulge investors to goody from the strategic reinvestment in higher-yielding immuration as existing immuration mature and distribute income. 

Notably, Abacus’ yoke model portfolios have seen their yield to maturity increasingly than double in the past two years due to strategic reinvestment in higher-yielding bonds. This is an example of how a well-structured investment tideway can transform challenges into opportunities.

Energy Sector Insights

The energy sector’s performance in the third quarter was a stark unrelatedness to its prior underperformance in the first and second quarters of 2023. Over the past two timetable years, energy has managed to outperform, but this comes without a challenging stretch, with poor performance in five of the eight years leading up to 2020.

Chart showing energy quarterly performance comparison vs the market

Exhibit 5: Energy performance comparison vs global equities for the first, second and third quarters of 2023. Dimensional Fund Advisors.

Chart showing the weightier and worst performing sectors from 2008 to 20022

Exhibit 6: Weightier and worst performing sectors from 2008 to 2022. Dimensional Fund Advisors.

The energy sector’s performance serves as a reminder that diversification is essential, as specific sectors can walkout significant volatility, impacting investment portfolios.

Rebalancing and How It Works

Image demonstrating rebalancing

Exhibit 7: For illustrative purposes only.

Diversified portfolios consist of various windfall classes, each with its own risk-return profile. These windfall classes do not move in tandem, causing portfolios to skid yonder from their target allocations. At Abacus, we monitor our vendee portfolios intently and employ strategic rebalancing to realign them with their intended windfall allocation.

This fundamental practice ensures that portfolios maintain the desired risk profile and pinion to long-term financial goals. To maintain a simplified example of what’s happening in Abacus portfolios, imagine a portfolio’s target typecasting is 60% stocks and 40% bonds. If stocks outperform immuration and shift the typecasting to 70% stocks and 30% bonds, a rebalance is necessary. This process involves selling stocks and ownership immuration to restore the portfolio’s desired 60/40 allocation.

Diligent portfolio monitoring and strategic rebalancing play a crucial role in keeping investments on track, particularly during turbulent market conditions.

AI in Finance

Artificial Intelligence (AI) is a subject of growing interest and snooping in the financial world. To explore more, we invited Gabe Brenner, an Abacus counselor and investment committee member, to share his insights on AI in the context of finance. Gabe recently published three blogs on the impact of  AI  in finance including, “Artificial Intelligence, Your Portfolio, and Our Future,” “How a Chatbot Explains Financial Theory,” and “Financial Counselor vs. AI – Who Gets it Right?” During our discussion, Gabe shed light on some pressing concerns.

What are the risks of present-day AI?

Gabe highlighted several risks associated with present-day AI. First, he mentioned the risk of automation and job displacement, particularly for those in clerical or legalistic roles. AI’s worthiness to automate unrepealable functions within jobs could lead to job loss in specific sectors. However, he moreover emphasized that this isn’t a new miracle and has been observed throughout history with technological advancements. He stressed the importance of preparing for these changes and focusing on the net benefits of AI for productivity and economic growth.

Another risk Gabe discussed is the potential for AI to propagate disinformation. AI, particularly in generating text and images, could be used to spread misleading information, which can have consequences, expressly in sensitive areas like geopolitics. Additionally, AI has the topics to learn from historical data, which includes prejudices present in human data. As a result, AI systems can inadvertently reinforce these biases. He underscored the significance of ensuring that AI aligns with humanity’s needs to mitigate these risks.

What does AI midpoint for your investment portfolio?

Gabe indicated that AI will likely transpiration the investment landscape. He mentioned Nvidia, a visitor that designs computer chips, which has seen its stock rise due to its chips’ relevance in AI applications. However, he cautioned that predicting which companies will be the future winners in the AI industry is challenging. While some companies may initially possess an advantage, that wholesomeness often dissipates as others reservation up. Despite potential productivity enhancements from AI, predicting specific stock market outcomes related to AI remains highly fraught.

How could AI impact the finance industry?

Gabe’s response highlighted that AI’s role in the finance industry could bring changes. While he didn’t foresee AI enabling well-judged market predictions, he suggested that AI’s primary impact in finance would be on data wringer and administration. AI’s data-processing capabilities could increase productivity in areas like financial analysis. However, as it pertains to portfolio management, he noted that the dynamic and unpredictable nature of financial markets doesn’t uncurl well with the stable patterns that AI typically relies on for making predictions. He moreover emphasized that the primary snooping should be ensuring that AI aligns with humanity’s interests, highlighting the importance of upstanding and regulatory considerations.

In summary, the dual nature of AI’s potential, offers both risks and opportunities in various domains, including employment, information accuracy, and financial markets. It is vital for investors to stay informed and transmute to the evolving landscape where AI plays an increasingly significant role.

We’re Here for You

The market’s history is a testament to its resilience, and while challenges may arise, those who remain single-minded to their investment strategies tend to unzip financial success over the long term. As we navigate market changes, Abacus continues to stand by our transferral to provide clients with sound, data-driven translating to help them unzip their financial goals.

We encourage investors to focus on their objectives and stay the course, remembering that market fluctuations are part of the journey. Your financial well-being is our top priority, and we remain defended to profitable you in your journey to financial success.

If you have remoter questions or need personalized advice, don’t hesitate to reach out to your Abacus counselor or schedule a call. In a world filled with financial complexities, having a trusted counselor can make all the difference in serving your unique needs.


Historical performance results for investment indices, benchmarks, and/or categories have been provided for unstipulated informational/comparison purposes only, and often 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. It should not be unsupportable that your Abacus worth holdings correspond directly to any comparative indices or categories.

Please Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be increasingly or less volatile than your Abacus accounts; and, (3) a unravelment of each comparative benchmark/index is misogynist upon request.

Please Moreover Note: This material is not intended to serve as personalized tax and/or investment translating since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Abacus Wealth Partners is not an written firm. Please consult with your tax professional regarding your specific tax situation when determining if any of the mentioned strategies are right for you.

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