Q4 Economic and Investment Outlook: This Time is Not Different
One of the most anticipated recessions in U.S. history has not occured yet in 2023. Is this time different?
We discuss why markets have been strong so far, and why they may slow down going forward. As always, we discuss actions investors should consider based on what is happening in the economy and markets. See the list of topics and chapters below the video:
Contents:
0:00 Overview + Long-Term Perspective
6:18 Labor Market 8:20 Inflation
13:35 Manufacturing Decline and Service Growth
14:24 Consumer Headwinds
17:30 Debt & Deficits
23:20 Are We In A Recession?
24:35 Interest Rates
27:08 Stock Market Outlook
28:45 Bond Market Outlook
30:31 International Markets (+ China)
33:01 What Should We Do Next?
Transcript:
Hi, everyone, welcome to our 4th quarter outlook for 2023 we titled this one. This time is not different. We're going to spend some time talking about all the uncertainty that's out there and how you should invest based on everything that we see in the markets in our 3rd quarter outlook. We discussed that we hadn't yet reached the most anticipated recession in the history of the United States. And as we head into the 4th quarter, our view is that we're still not in a recession and that 1's not imminent. But while the market seems to have moved on to the soft landing narrative, and everything's going to be okay, we don't think this time is going to be different.
Every time we get to 1 of these moments in history. We wonder if this will be the time that data and logic and economics and the business cycle are suspended and different results occur only to be proved wrong. Every single time, despite a history of mean reversion, which means that the market goes up and it comes back down.
And then it goes up and it comes back down. We wonder when we get to the top of the chart. If for some reason, why this will be the 1 time. That it doesn't go back down and that history doesn't repeat itself. This time is not different than any other market cycle. The timing is longer and attempting to time the market or the economy is really challenging to do.
And it's not something that we recommend. So in our outlook for the remainder of the year, we'll discuss why we aren't in a recession. Some of the headwinds that are cropping up that are maybe going to create a recession in the future, or at a minimum, we're going to create slower economic growth based on a world that's fraught with challenges from higher interest rates.To global shutdowns to the rising prices in oil over the last couple of weeks before we dive in capital stewards, we focus on helping families make smart investment and financial planning decisions across generations. We help families, regardless of their level of wealth. We help them build assets, save and invest responsibly, reduce taxes and most importantly, empower their kids to be good stewards.
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All right. So let's dive into markets.
we'll start with a long term perspective. As always, we'll talk about interest rates, inflation. We'll discuss our views on the most anticipated recession in history that I mentioned that never seems to quite arrive. And of course, we'll cover our views on stock and bond markets. You can see in the 1st chart, despite all of the uncertainty in the world, the S& P 500, which is the index that represents the 500 largest companies in the United States is up 13 percent year to date.
That represents really strong returns from a historical perspective and in a year, by the way, when everyone expected, or nearly everyone expected a recession. So markets have done the opposite of what everyone expected to occur. When we go back to December of last year, conversely, because the economy has been so strong interest rates have risen, especially in September and October.
The, the last part of the 3rd quarter, and so interest rates have caused bonds, which are the green line.
For the year, since we are long term investors, we always start with looking at long term returns. So you may be tired of hearing this from me by now, but it is so important. We don't want to get caught up in short term thinking that could cloud our judgment and make decisions solely based on what we see sort of around us in the short term when we look long term, the S and P 500 is earning just under 8 percent on average, since 1997, I think during downturns and during lots of volatility, it's especially important to look at prior peak to trough declines verse today.
For example, even if you had invested in stocks, which are the red line on this page, the S and P 500 or bonds for that matter, the green line at the height of the tech bubble or right before the great financial crisis, or right before the COVID crash you would still be a happy investor today.
You can also clearly see in this chart that despite all the uncertainty over the last 24 months, the stock market has gone down and then it's route for investors that sold out expecting a recession that may have missed the rally that's taken the market back to near post COVID market peaks. So that's why it's so important to stay invested.
So we'll discuss where markets in the economy stand, but your view should never. Reclude you from buying and holding the right long term investment portfolio. You likely have long term investment goals, right? That are going to be achieved over 20, 30, even longer years.
And so it's really important to have a long term investment plan and to keep a long term perspective so that you can participate in those returns over time and not get sucked into. To the gyrations of the market over, over shorter time periods, if we zoom in just slightly to the last decade, you still likely experience significant stock market returns, even after the 2022 downturn stock markets are well above their pre COVID peaks over the last decade stocks have performed as the best asset class followed by real estate and even more.
So if you used debt to buy real estate bonds, which are the green line have slightly underperformed inflation. Even if you look at the, the coded period to today, despite all the geopolitics, all of the uncertainty, inflation and lots of volatility, you see higher stock returns over that time period.
If you don't hear anything else in the outlook, this has demonstrated how important it is to stick with an investing plan over the long as long term. Investors S and P returns between 9 and 12 percent are generally more than enough to accomplish our investment goals. We don't need to earn 15, 20, 30% usually to do the things in life that we want to do with interest rates now at highs.
Not seen since the last decade bond returns going forward should be even higher than the 2 to 4 percent historical averages. So even with perceived volatility in markets, it's more important than ever to build an investment portfolio that you can stick with. So that you can take advantage of long term compounded returns.
And if you aren't comfortable with your current plan. Or if you don't think that it is something that you can stick with over the long term, then you need to seek out professional guidance. That's where our team would love to dive in with you. Talk about your situation in depth. We'll put a link in the show notes to make it easy to get in touch with our team.
So now that we have a little bit of backdrop on where we sit vis a vis history, and we kind of understand the big picture, let's talk a little bit about the current state of the economy, and then we can move into into markets. So, the economy is making progress in closing the gap between unemployed workers, those folks that are looking for a job and the jobs that are available on the market.
What's notable, you can see in the chart in the left, almost all the work that's been done to close that gap has been a reduction in the available job postings. You can see. That red line they are coming down companies are choosing to hire less as interest rates have gone up, the economy slowed down, demand has slowed down.
And so they're just hiring less people. The number of open jobs is down from almost 12Million to just under 9Million. The number of unemployed workers has barely budged over that period of time. So rising interest rates has slowed down the economy. The employment to population ratio is still slightly below where it was prior to the pandemic. But it's pretty close, but within about 1 percentage point.
So when we think about that from a statistical perspective, we're pretty close to where we were before the pandemic started we've seen labor force participation. So that means the number of people that were completely out of the labor force, they weren't working and they weren't looking for a job.
We've seen that take up a little bit this year. But the employment population ratio suggested, even if that got all the way back. To where we were before the pandemic, that's that's another 1. 6M workers or so that are sitting on the sidelines. That's still not going to completely close that gap between the number of job openings and the number of available workers.
So, the job market is still really robust, particularly in service based industries. And even though the job market isn't as hot as it was a few years ago, we've, we've made good progress closing the gap between jobs and workers. We're still far from having high levels of unemployment that would drive us into a recession.
Right? I think the fear is, hey, are we going to have a recession overnight? And as long as we still got that gap out there, and it is moving in the right direction to close, but as long as it's still there, we're not going to have a recession near term.
The other thing that we're learning is, is that the tight labor market is not pushing inflation higher. Inflation is falling though. The labor market is tight. In some places. It's becoming clear that income changes don't drive inflation. They follow inflation as inflation goes up. Employees ask for pay increases.
They change jobs to obtain a pay increase. Work from the San Francisco fed earlier in the summer demonstrated that as well. So, despite a decent job market, inflation continues to fall as the extreme levels of demand from goods that were spurred by all that pandemic spending and all the excess demand that we created coming out of the pandemic as that wears off.
Inflation is going down and price increases are lower across the whole economy. It's not isolated to a few core areas. We. We expect that trend to continue until it reaches at least three and a half percent. Once core inflation is in the 3 percent range, I think then the Fed's going to have to reckon with this kind of 2 percent target and decide how important is it really to get all the way down to the bottom longer term with artificial intelligence.
I do think anything is possible. So I, I think the idea that inflation is going to be much higher than it was historically , for a long period of time. I think that's a little bit of a challenging perspective to prove, especially if you believe at the same time that AI is coming on and artificial intelligence is not going to change the labor force significantly short term, but certainly when we get into the back half of the 2020s, I would expect that that's going to reduce the need for workers by some level.
And in the same way that computers and technology have always changed the jobs that are available to folks and the demand for workers in the economy, I will have that same impact as well. And there'll be new things that we didn't even know were jobs 10 years from now. And there'll be some things that people do today that we won't need them to do anymore.
So we've talked for many quarters now about the need for Fed policy rates to move above the core inflation number to significantly slow the economy. And as we expected, we finally saw that happen in the 3rd quarter. You can see on the chart core inflation has dropped from. 6.6% to 4.35%. Headline inflation has moved down below that to 3.67%.
That headline number is largely driven by lower energy and food prices. And those have actually started to increase it a little bit again short term. Remember that monetary and economic policy don't control the prices that we pay at the pump. That's why the Fed uses core inflation measures and, and the core numbers to assess what's actually happening in the portion of the economy that they can control.
Right? By raising interest rates, where can they actually change? Prices and that's, that's not in, in food and energy. I also added core PCE, the personal consumption expenditure index this quarter, because as we get closer to that target, that's the feds preferred measure of inflation, it's measured a little bit differently than CPI, which is what you see on the news a lot.
And core PCE is, is the number that when the fed says they want to get to 2%, that's the number they're trying to get to 2 percent is core PCE and that's still running at 4. 24%. So we're still more than double the target. So inflation is trending down, but we still have a little bit of work left to do and despite oil prices rebounding a little bit, I expect core inflation to continue to trend lower into year end.
And that's because housing costs are a major contributor to core inflation and the measurement tools that we use to measure housing costs. They lag what's happening in the real world significantly. You can see in this next chart, the red line is the change in housing prices that's reflected in the inflation numbers that you see published.
In the CPI, the green line reflects the actual change in rental prices, according to Zillow. And you can see how those have returned to a modest annual growth, right? So there's new rental contracts that are being signed or back down to where they were prior to the pandemic home prices, which are the blue grade line.
And those are essentially flat year over year, maybe up a little bit in the last couple of months, but but basically flat over the last year and remember that real estate is location specific. So, I have a lot of folks to say, well, you know, my neighborhoods prices are are increasing a lot or in my neighborhood.
We've seen prices fall a lot. That that happens in over the course of the entire. Country, we see sort of a flattish flash real estate market. So remember that just because in your particular neighborhood prices might be doing 1 thing. That doesn't mean that they're doing that nationally during 2020 and 2021.
that gains and rents and housing prices were probably under reported a little bit in the inflation stats. Right? So you saw those were up a ton and they and they. You know, that red line didn't move up, you know, probably enough to reflect that. And so now you see that that red line is probably over reporting the, the impact of of rising rents and home prices in inflation.
And so we expect us to go through the rest of the year that what's happening on the ground from a real estate perspective will continue to pull inflation. The inflation numbers down,
so 43 percent of that core CPI number is, is based on home prices, and that is going to be lower as we go into year and not higher. So, when we think about Fed policy now that inflation is below the Fed's policy rate perhaps substantially below the Fed's policy rate and the, the Fed has the brakes on the economy.
The business cycle still exists companies and people and the government still need to borrow. So higher rates are going to cause the economy to slow down that eventually ends in a recession without rates being cut. Prior to the start of recession. The math just doesn't work any other way. If we keep slowing and slowing and slowing and slowing, we're eventually gonna stop.
There's just no other way that that works. And when we look at economic activity, me. As we expect at the beginning of the year, the economy is slowing down, but it's not in a recession. The ISM survey for manufacturing continues to be really weak. It's at levels typically correlated to recessions, but the service sector industries are service sector businesses.
That survey suggested there's still growth. And remember, when we look at ISM data, there's still growth. Anything above 50 means that that particular sector is growing and below 50 means it's contracting. So it's not so much about the number, but it is it's more about where it is relative to to 50.
and so you can see service sector 47. 6. so that's pretty contractionary. And then, and then the opposite from a, sorry, manufacturing, you see 47. 60 and then you see the service sector still above 50 and growing pretty strongly. It's notable that the economy needed to slow. I think from overheated levels in 2020 and 2021.
so you can see those record ISM business activity data points on the chart. So, it is possible that we're simply slowing from an overheated economy, and we're not. Imminently going into a recession, we're going to, you know, we could see these things take back up towards average and they just have corrected.
That would be the, the sort of the soft landing narrative that everybody talks about the thing. That's really been keeping the economy afloat. So far in 2023 has been the consumer, but the headwinds to the consumer. are mounting. If you haven't heard about this, we'll talk a little bit about that here.
Through August, consumer spending was still stable. Non store services spending, as you would expect, right, above average. ISM data shows that as well. And in store retail sales were below average. So on the good side, things are not as rosy. Spending has come down from the spending binge of 2020, 2021. We're coming off the sugar high, so to speak.
But going forward, the consumer can hold in right here. Or things can get worse. I don't see a material pickup in consumer spending. That's going to continue to drive the economy near term. And that's because of all the headwinds that I think are out there, the San Francisco Fed updated their analysis of excess savings that built up during the pandemic over the summer.
And almost all of it was gone by July. And certainly the small remainder that was left in July probably ran out in August. And so. Not surprisingly, as consumers have spent down all of their excess savings from the pandemic, you see that credit card activity, that yellow line on the right chart has picked up and the uptick in, in credit card spending, it.
Most of that was a recovery back to normal level. So we saw consumers deleverage and pay off debt during the pandemic. A lot of that increase was back getting us back to average. We may be a little bit above average now, but I wouldn't just look at that uptick and look at the entire uptick and say, oh, that's a bad thing.
Consumers are over leveraged like they were. We're still nowhere near what you see on the on the left hand side of that chart, which is the kind of pre financial crisis levels of consumer debt. So consumer debt is not necessarily. Unsustainably high, but it's certainly higher than it was before. And it seems to me that with credit card rates now above 20%.
The idea that consumers are going to continue to spend on credit cards you know, that that just doesn't seem to foot with me. So I think you'll see less of an uptick going forward. Now. The rates are higher. We also see student loan payments start again this fall. Overall, I think the impact of that will be pretty negligible.
It's certainly not helpful though, right? It's not going to be a tailwind. It's going to be a headwind. The largest student loan payments that will come from high income earners and those earners are unlikely to change their overall spending patterns based on low payment loan payments. We've seen that historically.
And also I do think there are some portion of borrowers that will continue to defer making payments into next year. Probably the lower income borrowers. And so that pushes that impact to consumer spending on out into 2024 card spend data from the large banks the last few weeks show that consumer.
Charges, so we can, we can look sort of in more real time at what consumers are actually spending by every time they swipe those debit and credit cards. And the card spend data is, is flat over the past few weeks. And so again, not a huge decline, but certainly not not a lot of strength either.
So, despite all of that wages still grew in August, a healthy 4 and a half percent. Wage increase, some of that probably a reflection of gains from inflation in the last couple of years. So, like we said, in July, I think as long as employment remains robust it seems likely to me that the consumer can sort of trudge along here.
They're in a more precarious position, so if we get really high oil prices if we have any more shocks I think that's how they could get pushed off the ledge is, is if there's more shocks in the economy. But I, I do think as long as As long as employment remains robust, then then we, the consumer can go on, like, they, like, they're going down at least for a few more a few more quarters.
So the deficit has been a subject of discussion lately with the debt ceiling showdown in the spring and now the shutdown in the fall. So let's talk about the shutdown that is I'm recording this on Saturday afternoon, but I have no doubt that by this evening, we'll have a government shutdown.
And then we can discuss the larger deficit and debt problem a little bit after that. So 1st, the timeline for the shutdown matters. A week doesn't impact that much, but after several weeks, government services that are needed by the rest of the economy, think building inspections, drug approvals, transaction closing, not to mention government spending on contractors, goods and services, et cetera.
It starts to add up. And so Moody's analytics puts the cost of a shutdown at about one 10th of 1 percent of GDP. Every single week, the government is closed. So the impact certainly builds over time, a week or two, not as huge a deal, but if we get a month or a two month government shutdown now you're talking about.
You know, starting to take more than a half a point off the GDP in the 4th quarter. And that's you know, that could actually put us to flat or negative GDP growth in the, in the 4th quarter. What's crazy about the shutdown is that shutting down the discretionary spending of the government does very little if anything.
To fix the root cause of the deficits, which is the mandatory spending side of the federal government, things like Social Security, Medicaid, Medicare, those things all still get paid during a shutdown. And I'm not saying we should, we should stop making those payments, but we're, we're having a shutdown over the side of the budget.
That isn't going to fix any of these actual structural problems. So I think the struck the shutdown is more just grandstanding by. Congressmen and congresswomen however, well intentioned to, to reduce debt and reduce deficits, but grandstanding doesn't actually solve any of these problems over the long term.
The U. S. can support high levels of debt despite the discussion over the past couple of years. The U. S. is still and will remain the largest currency in the world. People want to buy us bonds because they're safe even when we shut down the government. What do people buy? They buy bonds. That's not changing because 1 country here.
They're started trading in consequential amounts of oil in Chinese. You want? I, I'd like to ask the question this way. Would you put your life savings into a bank in China where the assets can be expropriated by the government any day of the week? Most people would say, no, I would never do that. Right?
So I don't see despite maybe, you know, maybe structurally, the dollar depreciates a little bit. Maybe it's a little bit high over the last couple of years. I don't see this major C change coming to to investments in the dollar and therefore investments in in U. S. bonds. So if we get back to the debt, the debt can be large, but it can't grow at the rate that it's growing now for forever.
At some point, especially with persistently higher interest rates, and that doesn't have to be 5 percent by the way, 4 percent would be significantly higher than the rates have been over the last couple of years. The rest of the world's eventually going to begin to doubt the certainty of the US government to to pay its bills.
And nobody knows what that level is. Cause we've never hit it before, but it's, it's not an infinite. It's not an infinite level, right? In addition to not having sort of infinite borrowing capacity, unlike U. S. companies, the government didn't term out its debt when rates were low over the last couple of years because short term debt was even cheaper. Most U. S. companies said, hey, that long term, you know, interest rates are really low.
What we should do is borrow a lot of money now so that we don't have to come back to markets in a few years when interest rates are higher. That makes financial sense. The U. S. government said, hey, but that short term debt is so cheap. We can keep getting it. We should just keep doing that. And so now as a result of that, a lot of those issuances are coming they're maturing and they're coming due.
And so the treasury is reissuing record levels of that longer term debt at at much higher interest rates. And so overall. The fiscal situation hasn't necessarily been managed all that well near term. So the overall strategy should be for the government to spend in times of crisis. There's not actually anything wrong with spending when things happen like cobit, but then you've got to pay down the debt in times of plenty so that the overall debt, the percentage of GDP stays manageable.
And I don't know exactly. What the long term sort of growth figure should be. I don't think anyone does, but I know what it's not. And it's not growing in almost 20 percent over a three year period like we've seen recently. So kind of like inflation, something in the lowest single digits as a percentage of GDP.
That seems really manageable. But the exact amount is really hard to quantify. 20 percent is not low single digits. So Congress will eventually need to act to reduce spending. That, that there's no question about that. That's going to have to happen, or eventually you will get something you know, like a default or down more downgrades or countries will just stop buying our debt and then interest rates will be even higher than they are today.
That's going to probably require a bipartisan approach. I just don't see a Republican controlled house president and two thirds of the Senate happening in the near term. It's possible politically, but that seems kind of unlikely. So, a bipartisan approach seems a much more likely outcome. None of that's going to happen in the next 18 months.
Right? We have a pretty divided Congress. We're not going to get a. Massive spending reform in the next 18 months. So I think we need to end the shutdown. We need to come to an agreement that hopefully reduce the spending a little bit, take the one that we can get. And and, and sort of move on, move on from there.
Okay. So let's talk about, are we in a recession? And before we do that, I didn't mention the UAW strike and any of the other pages, similar to the government shutdown, I think the longer that that drags on the more of an impact it has on the economy. There's some news coming out this week. It looks like maybe they're making a little bit of progress.
It does seem like they're getting more towards a reasonable solution there. So, if we have slower trend growth in the, in the 4th quarter, like, 1 or 2%, and we have a prolonged government shutdown, plus a prolonged strike, plus mounting headwinds against the consumer, then I could absolutely see a scenario where we have.
0 percent growth are slightly negative growth in the 4th quarter. What's sort of interesting is that that negative growth scenario would be the result of sort of self inflicted gunshot wounds. The strikes the shutdown not just the core interest rates in the underlying economy. But our, our view continues to be that the economic miracle of the U.
S. economy and the U. S. consumer in particular is going to carry on until it doesn't. You can see in the chart that consumption drives almost 70 percent of GDP. So, it's hard to forecast a recession without significantly higher unemployment and lower consumer spending. And we talked about how strong the labor market is a couple of pages ago.
So, I don't think that the business cycle is non existent. Or that the most significant rate increases in our generation are going to go unnoticed without the economy. I think if rates stay high I think the economy is going to be pushing against a lot of headwinds to stay afloat in the middle of 2024, but that's still a pretty long way away.
So, for now, I think we're in a slow growth period. We're slowing down. We're not in a recession and and 1's not going to happen in the 4th quarter again, without some of this stuff you know, our sort of own self inflicted wounds around the shutdown or strikes or things like that. You know, causing, causing us to, to tip into a recession.
So what does all that mean for markets and investing? We've been beating the dead horse on rates for the last 18 months. I think we finally have pounded that thing into the table. And we, we expected that rates would go higher than everyone expected and that they would stay higher for a longer period of time in July of last year in our mid year review.
The market and the Fed expected rates to peak in 2023 around 3. 75 percent obviously rates and move a lot higher. So the Fed policy rate is now 5. 5%. And and the market has finally priced in higher for at least somewhat longer. If you look on the chart on the left hand side of the page, you can see remain.
The market is expecting short term interest rates to remain above 5 percent through really through early next year. And then maybe some cuts towards the end of next year. But but pretty modest cuts. If we see any at all, given that we haven't seen a slowdown from the consumer or increased unemployment, I think.
The very gradual step down in rates in the 2nd, part of 2024 and 2025 makes sense. Previously. I would have thought that lower inflation itself, which we have seen. We talked about that a little bit would cause the Fed to cut rates you know, to prevent potential economic damage. But now the more recent communication from the Fed seems to signal that lower inflation itself is not going to be a good enough reason for them to cut rates.
I think the Fed needs to see unemployment actually move higher and consumer spending. Cool off. They need to see economic damage and weakness before they actually start to cut. We can have a debate about whether that's a good thing or not, but that seems to be their position. So it wouldn't surprise me now that everyone has finally caught on that rates needed to go higher and stay there for longer.
If now rates. Fall faster than everyone expects because the economy does actually start to cool off into 2024. We see some of those headwinds kind of kind of emerge. But again, I think that's a story for for 2024 in the middle of 2024. not for 2023. real inflation is running about. 2. 5 percent according to true inflation.
So if we think about what's actually happening on the ground in the economy we think inflation is pretty close to the 2. 5 percent level. And so the Fed is hard on the brakes with interest rates at 5. 5%. Like I talked about earlier, if you keep hitting the brakes eventually you're going to stop the car.
Historically, rates have fallen pretty quickly at the end of a cycle. But with underlying economic strength, that seems to be, again, a question for the 2nd quarter of 2024, not for 2023. So, for now, it seems appropriate to be rebalancing back into longer term bonds, but very gradually and over a longer period of time, given the underlying strength of the consumer.
.So the S and P 500 finished the quarter down slightly from an index perspective the leaders for the year remain the tech stocks. Even though we saw them get back some of the gains in the quarter, they still remain the growth driver so far for the year.
A lot of folks have made the case against tech growth names like Apple and Google and NVIDIA going forward. Although growth continued to outperform in the quarter, growth outperformed value and the S& P 500 index outperformed growth. We know from history that that growth outperforms and slowing economies, and we have a slowing economy. So as long as interest rates don't rise significantly from here, it seems to be that the environment going forward will be supportive for for growth as we head into 2024 broadly company earnings were down in the 2nd quarter and analysts expect earnings to remain kind of flat in the 3rd quarter.
There are a lot of headwinds. Building. So like we mentioned a lot of those, so those are probably going to take effect in the fourth quarter and into next year. So I think the Q3 earnings reports that we're about to see over the first part of October we'll still show a lot of resiliency that we saw in the economy over the summer.
So with rates high, but stable and, and kind of not headed lower immediately it seems like the multiple that we pay for stock. So the price earnings ratio of the S and P 500, isn't going to go much higher from here either. So if earnings are kind of flat. And the, the way that we value the earnings, which is what gives us the price that we pay for the stock is sort of stuck.
It makes it's it's hard for us to make a case that we're going to see significantly higher index level stock prices from here. But we never advocate selling out of stock portfolios, but it seems like the time to kind of stand pat rebalance if stock prices go down and sort of wait out the higher rate environment.
If we turn back to bonds a little bit, we saw rates move up considerably in the 3rd quarter, especially for longer term maturities. The 10 year U. S. Treasury yield move from 3. 7 to 4. 5%. It was up almost to 4. 7 percent intraday. You can see the interest rate curves on the chart on the left hand side. The result.
Of an increase in interest rates is that existing bonds are worth less because the existing bonds pay less. So you can see that after outperforming in the 1st, half of the year, long term bonds sold off in the 3rd quarter
we discussed beginning to add duration or beginning to buy longer term bonds. Obviously we were a little early and starting that process you know, would be ideal to start it only at the peak of. Of the markets, but we talked about that's really difficult to do. So my expectation is that lower inflation would result in the Fed beginning to pivot or pause.
And in reality, the rhetoric from the Fed has been that rate should remain high while the economy remains strong. So. It's difficult to time the interest rate market. And, but given the headwinds that we see in the economy, our view is still that investors should rebalance continue to build out those longer term bond portfolios, maybe more slowly over time, perhaps taking 6 to 9 months, taking a longer period of time.
Maybe then you know, we have would have taken historically to do that. But going slower allows investors to still take advantage of really high short term real yields while we do that. Right? So, you know, in the shorter end of the yield curve, we're still earning a 5, 5 percent of our money or so. So while the economy continues to sputter along, we want to take advantage of that, but we need to be mindful that we need to be rebalancing, particularly if, if you know, we lost money in bonds this quarter, we need to be rebalancing back to target levels so that we're building out that longer term bond portfolio.
Okay. Thank you. Over time, as we head into a potentially weaker economic environment in 2020 let's talk a little bit about what's going on internationally. Now that growth is normalized a little bit. We see the U. S. GDP growth at 2. 5 percent is ahead of the majority of other countries. Notably. I think there's been a lot of discussion about China lately.
China's reported GDP remains high and, and I, you know, we say reported, right? Because we know that maybe there are some issues there, but the conditions on the ground might be a little worse than that, but it's still probably higher than GDP in the U. S. More importantly, the property hangover in China is going to take some time to work out.
Not unlike the real estate situation in the U. S. 2006, 2007, 2008. I don't think China's headed into a crisis or a long term downturn. The Chinese government has not stepped in yet to bail out property developers and the debt holders. I suspect a lot of that is because a lot of the debt is actually owned not by Chinese locals, but by international investors, us hedge funds, and things like that.
And so the government's not all that incentive to to bail them out. But if things get bad enough, the government usually steps in to provide really significant stimulus. And I think they would do that here in this case. I think China's days of really fast growth ahead of the rest of the world are probably behind it.
But I think there's a, there's a big gulf between, you know, slower. But positive growth and a collapse that's it. China doesn't appear to be an attractive place to invest at the moment. I think other emerging markets, India, the rest of Asia, Latin America seem to be the recipients of some of the diversification or the disinvestment that we've seen in China.
We typically recommend active management strategies and emerging markets to take advantage of those kinds of dislocations. And so we kind of continue to recommend that approach as we think about emerging markets going forward. In Europe, we see high rates and peaking inflation and really low growth.
That is the definition of stagflation. So it's just 1 of the reasons why European stocks are cheaper than their U. S. counterparts because they're just isn't much growth in the economy. A U. S. slowdown only makes the situation worse internationally and emerging markets and in Europe. So our, our view is that that Europe continues to underperform over the next, over the next year or so.
So, given the challenges in the rest of the world, I continue to like international bonds. Particularly emerging market bonds, as opposed to, as opposed to international stock. So far, international bonds have outperformed their U. S. counterparts this year as those countries experience weaker economies as they stop hiking rates and they move to cut rates to simulate their economies.
Those, those bonds should increase in value. Many other countries are further ahead of the U. S. this economic cycle. And so we expect them to cut rates ahead of the U. S. Federal Reserve. So bonds over stocks when we look at international markets. So what should we actually do given all this stuff that we talked about?
So continue to move slowly out of cash and into stocks and bonds. If you hold too much cash in your portfolio, which a lot of folks still are post pandemic it's time to get reinvested because when, when interest rates start to go down, they will move down very quickly. And you won't have time to, to complete that cycle.
Don't try to pick the top of the interest rate market or the bottom of the stock market trying to do those things is really challenging. So you want to slowly invest over time and not try to get too cute, trying to, trying to call tops and bottoms of the market because you're unlikely to be successful.
And then remember, I think about international bonds, in addition to international stocks in your portfolio. A lot of folks will say, oh, yeah, a little bit of of, you know, European stocks, or I own emerging market stocks. But then when you look at the bond portfolio portfolio, it's all US corporates and US treasury.
So you want to have a diversified approach to your bond portfolio as well. As your stock portfolio with that again, feel free to reach out to our team. If you have any investing or financial planning related questions, we'd love to get to know you and better understand your goals. And our team would be happy to serve you.
If our approach aligns with your needs, we'll be back with more content later in the 4th quarter. As we set our sites on 2024. And I'll just I'll make a small plug here. We, we released a podcast and some articles on real estate investing in particular. So if you're interested in what's going on in the real estate market, both how to start building a real estate portfolio and how to scale a real real estate portfolio over time.
So, how do you think about investing in real estate? And then also our views on the different segments of the real estate market that came out over the last couple of weeks. So check that out if you haven't done that. And we'll be back, like I said, later in the quarter to talk about 2024 and I look forward to seeing everybody in person between now and then.
All right. Bye. Bye.