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Our Thoughts on Third Quarter 2023

Matt Johnson, CFA® - Andy Nugent, CFA®

Market Recap, Portfolio Analysis, and Review

The market was down in the third quarter with September being the worst performing month. There are several economic factors at play that will result in consumers having less disposable income. 40 million people need to resume paying their student loans in October. Higher interest rates mean higher rates on credit cards and loans. We have seen a spike in oil prices due to oil production cuts by Russia and Saudi Arabia. Let’s not forget about Inflation. While not as high as it was, it is still above the Feds target, and moved the wrong way last month. All of this plays a role in reducing the amount of consumer disposable income. Politically, we continue funding a war, had the risk of our government shutting down, and continue to have a crisis at the southern border. This affects consumer confidence. A combination of factors that resulted in negative market performance. That said, there is always something going on in the world that can make the markets nervous and cause short-term volatility. Despite all of this, per Reuters, 66% of companies exceeded earnings estimates in the second quarter. Earnings matter. We will see if this trend continues when companies begin releasing earnings for the third quarter in the coming weeks.


The Consumer Price Index increased by 0.6% in August to 3.71% year over year. A contributing factor in August was Energy, which was up 5.6%. While inflation is off its peak levels seen in the Spring and Summer of 2022, it is still above the 2% inflation goal that the Fed has set. With the CPI ticking higher in both July and August.

Interest Rates

The Fed raised rates one time in the third quarter. They raised rates by 0.25% in July. The Fed Fund rate is now between 5.25% - 5.50%. While there is a lot of speculation on when the Fed will begin cutting rates, we think that is a bit premature. One thing the Fed has been very clear about is reaching their goal of 2% inflation. We do not believe rate cuts will be coming any time soon. They will likely hold rates steady or possibly raise them if inflation continues its recent uptrend.

The yield curve is inverted. This means that short-term bills are paying higher interest rates than long-term bonds. This trend will likely continue as the Fed remains hawkish in its battle on inflation. Six-month treasuries seem to be the sweet spot yielding nearly 5.5%.

Home mortgage rates continue to increase causing pain for potential home buyers. As rates increase, the loan consumers can qualify for shrinks given a set monthly payment. Per Bankrate, the average rate for a 30-year fixed rate mortgage jumped from 7.17% to 7.77% in the third quarter.

We would expect higher mortgage rates would lead to a correction in home prices, but that is not occurring. At least not yet. Current homeowners who have low mortgage rates are not willing to move as that would mean trading in their low-rate mortgage for a high interest rate on their new home. This is keeping inventory low. As a result, home prices, at least in California, continue to creep higher.

As for investments, we continue to purchase short-term treasuries, typically six months out, to capture the highest rates available. We hold to maturity and reevaluate at that time. We are also keeping higher cash balances in money markets as they are yielding over 5% and allow for any liquidity needs that may arise.

Sector Analysis

The S&P 500 was down 3.7% in the third quarter and down 4.87% in September alone. Year to date, the S&P 500 is up 11.68%. As a comparison, the Dow Jones was down 3.5% in the quarter and up only 1.1% year to date. Why the big discrepancy? The S&P 500 is a market weighted index. Meaning, the larger the company, the bigger the impact it has on the index. The large mega-cap companies have done well and have led the S&P index higher. The magnificent seven (mainly tech giants) have lived up to their name this year.

Only two sectors were higher in the third quarter. Energy was up over 11% and Communication Services was up about 3%. All other sectors were lower. Utilities were the worst performer, down over 10%. This makes sense as utility companies are typically purchased for their large dividends. But with interest rates being so high, investors likely prefer the 5% yield and safety of a money market or Treasury. Real Estate was also down nearly 10% in the quarter. Interest rates are having a big impact here. Both sectors are near their 52-week low.

Trading wise, we were relatively quiet in the third quarter. We purchased an Energy company, sold a Pharmaceutical, and trimmed a Consumer Staple. We continue to focus on high quality companies with good revenue and cashflows to add to the portfolio.

Energy – Sticking with our theme of buying quality companies, we purchased Chevron. A company trading at a reasonable multiple of earnings and cash flows. They are buying back shares, have a great balance sheet, and book value is a steady grower. It is currently our only Energy stock.

Consumer Staples – We pared back our position in Molson Coors. Someone had to be a benefactor of the Bud Light boycott, and we think Molson Coors is likely one of them. As the stock price neared our estimate of its true value, we took the opportunity to take some money off the table.

Health Care – We sold Walgreens Boots Alliance, Inc. This company is a sort of value trap. It trades at low multiples and pays big dividends. However, they are constantly paying out on a seemingly never-ending number of lawsuit litigations. After much discussion, we decided to part ways with this company.


The third quarter saw a moderate pullback in the markets. Inflation ticked up a bit in the August CPI number. We feel the Fed will pause on additional hikes to give the previous hikes time to settle in. We believe the market will remain choppy through the next quarter. If we get a positive CPI report, that should help the market move forward. At the end of the day, we continue to hang our hats on company earnings and take a long-term view. If the market does pull back further, it will likely create buying opportunities in this stock pickers market. We remain committed to investing in quality companies and taking a long-term view. We again thank you for your continued support in allowing us to help you to reach your financial goals.

Matt Johnson, CFA® - Andy Nugent, CFA®

Sage Capital Advisors, LLC is a Securities and Exchange Registered Investment Advisor. Sage Capital Advisors is headquartered in Sioux Falls, South Dakota. Advisory services are only offered to clients or prospective clients where representatives of Sage Capital Advisors are properly licensed or exempt from licensure. This market commentary is solely for informational purposes and should not be construed as investment advice, it is only intended to provide education about the financial industry. Historical performance results for investment indices and/or categories have been provided for general comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of investment management fees, or the impact of taxes, all of which would have the effect of decreasing historical performance results. Indices are unmanaged and cannot be invested in directly. It should not be assumed that your account holdings correspond directly to any comparative indices. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered unless a client service agreement is in place.


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