Fall 2023Volume 31 | No. 4 Market QuickTakes Q3 | 2023 Stocks end three quarter winning streak as volatility escalated in August and September and Q3 losses ranged from -2.6% to -5.5% across the board Despite the volatility and Q3 losses, Nasdaq and the S&P 500 remained market leaders for the year fueled by mega-cap growth stocks and closed Q3 up 26.3% and 11.7% YTD, respectively Market breadth narrowed in Q3 as mid-caps and small-caps, as measured by the S&P 400 and Russell 2000 underperformed, and the YTD disparity widened against large-caps, with the S&P 400 and Russell 2000 closing Q3 up 3% and 1.4%, respectively Overseas, developed market stocks also posted Q3 losses of 4.7%, and YTD gains for the MSCI EAFE index slipped to +4.5%; Emerging Markets dipped into negative territory for the year down 0.4% The US dollar gained 3.1% in Q3 on higher US interest rates and enhanced the losses for International markets priced in US$, impacting US investors The Fed and the bond market remained on center stage for the global markets and helped fuel the volatility, with the Fed raising policy rates another 0.25% in July, for the 11th time totaling 5.25% in its continuing battle to lower inflation, which closed Q3 at 3.7% year-over-year (Aug) Interest rates rose in Q3 on better-than-expected economic news and continued strong employment data, which furthered expectations that the Fed will keep policy rates higher for longer The Bloomberg US Aggregate Bond Index fell 3.4% in Q3 closing in negative territory for the year down 1.2%; the benchmark 10-year Treasury Note yield rose 0.78% in Q3 to 4.59% Past Performance is No Guarantee for Future Success 2023 Retirement Contribution Limits Market Review After strong start, volatility escalated in Q3 for both stocks and bonds The Third Quarter got off to a strong start in July, with stocks reaching their highs for the year by month-end. It was the strongest start to a year for Nasdaq since 1975 and the best for the S&P 500 since 1997 (Dow Jones). July also saw market breadth encouragingly widen as small- and mid-caps led for the month. However, markets also reached overbought territory and were overdue for a pullback, consolidation, or correction, which are normal after outsized gains. Volatility rose in August when credit rating agency Fitch downgraded the US long-term Treasury debt rating one notch, from AAA to AA+, which unnerved markets. Growing debt and “erosion of governance” stemming from ongoing debt ceiling political brinksmanship were noted by Fitch. It was the second downgrade in our nation’s history, with the first in 2011, and bond yields rose.Small- and mid-cap stocks led the market on the downside in Q3, reversing their strong July gains. The small-cap Russell 2000 fell 5.5% but remained up 1.4% for the year. The mid-cap S&P 400 slid 4.6%, and closed Q3 up 3% YTD. Market leaders for the year, the tech-heavy Nasdaq and benchmark S&P 500, also tumbled in Q3 losing 4.1% and 3.7%, respectively. However, their YTD gains remained impressive at 26.3% and 11.7%, respectively. The storied but lagging Dow Jones Industrials fell 2.6% in Q3, though the Dow remained positive for the year up a scant 1.1%.Overseas, developed markets also saw losses in Q3, with the benchmark MSCI EAFE index falling 4.7% to finish +4.5% YTD. A strong US dollar contributed -3.3% to the losses versus local currency terms. The European Central Bank raised interest rates twice in Q3 but easing inflation to 4.3% may put the ECB on pause soon. Emerging markets slipped into negative territory for the year at -0.4%, following a 3.7% Q3 decline and were pressured by continued economic weakness in China. The Fed, inflation, and interest rates remained at center stage in Q3. The Fed raised interest rates 0.25% to 5.25% at its July FOMC meeting in its ongoing inflation battle. It was the 11th rate hike since last March, totaling 5.25%. While inflation ticked up 0.3% in August to 3.7%, its downtrend from 9.1% last June remains on track. The US labor market remained strong and though unemployment edged up to 3.8% in August, it remained under 4% for the 19th consecutive month. The Fed kept policy rates unchanged at its September FOMC meeting.Given the sticky inflation reading in August and comments by Fed Chair Powell, including an upgrade in the Fed’s US economic outlook for 2023 and 2024, which further strengthened the case for a soft landing, interest rates rose across the yield curve in Q3. Markets began pricing in “higher for longer” Fed policy, which may or may not include one more hike. This put upward pressure on interest rates in Q3, and particularly in September when the benchmark 10-year Treasury Note yield rose 0.50% to 4.59%, its highest yield since 2007. The Bloomberg Aggregate Bond index fell 3.4% in Q3 and closed in negative territory for the year at -1.2%. Q3 was somewhat of a microcosm of 2022, with rising interest rates driving equity volatility and losses for both stocks and bonds, albeit on a more palatable scale. Inflation and the Fed are not the only catalysts for rising rates. A still massive Fed balance sheet, a burgeoning U.S. fiscal deficit requiring growing government debt service at now higher rates, and dysfunction in Congress continue to threaten US credit ratings. The OutlookThe rise in volatility presented a challenging end to the Third Quarter for investors with consecutive monthly losses in August and September. While the “higher for longer” interest rate outlook enveloped the market’s mindset in Q3, we are clearly closer to the end of the Fed’s aggressive interest rate hiking cycle that began last March. The futures market is pricing in less than a 30% probability of another final rate hike by year-end. On the other side, the market isn’t pricing in a rate cut until mid-2024 and the Fed now only sees two rate cuts for all of 2024 beginning in Q4-24, which aligns with the new mindset. The economy has been resilient amid the aggressive Fed rate hikes and has largely outperformed expectations. S&P 500 corporate earnings have surprised as well, with 76% beating expectations for Q2. Q3 earnings season now gets under way and will be closely scrutinized. While the economy is still expected to slow going forward, as noted above, the Fed upgraded its 2023 and 2024 economic outlook, which supports a soft-landing scenario. Risks for a mild recession linger, but the risk of a severe recession remains low, with Goldman Sachs recently forecasting that risk at just 15%.Though surpassing the end of July YTD market highs is a big challenge, our Year-End Outlook remains cautiously optimistic, despite a call for continued volatility in the near term. The horrific attack on Israel by Islamic terrorist group Hamas has escalated tensions to war in the Middle East and will add to the near term volatility. Support for Israel globally from the West has been overwhelming and led by the US.As Q4 begins, so does generally positive seasonality for the market, particularly November and December. Additionally, studies by Ned Davis and Goldman Sachs have shown when market returns are greater than 10% through July, followed by declines in August, or August and September, the Fourth Quarter has delivered strong returns for stocks historically. However, past performance is no guarantee for future results. It's important to remember, we are still in the recovery process from 2022. We continue to urge investors to remain resilient with their investment portfolios and maintain a disciplined, long-term focus. (See Dealing with Market Volatility below)Remain well-diversifiedMaintain discipline and patienceFocus on the long-termReview your Risk ToleranceCall your Nelson Advisor today at 800-345-7593 to discuss any concerns and review your portfolio. ~Your Nelson Securities Team *Past Performance is No Guarantee for Future Results Dealing with Market Volatility As our partners at Capital Group note: If market declines make you nervous, you’re not alone. But while bear markets can be extraordinarily difficult, they also can be moments of opportunity. Investors who find the courage and conviction to stick to their long-term plans have often been rewarded as markets bounce back.3 facts about market recoveriesFact #1: Recoveries have been much longer and stronger than downturnsFact #2: After large declines, markets have recovered relatively quicklyFact #3: Some of the world’s leading companies were born during market recoveries3 mistakes investors should avoidMistake #1: Trying to time marketsMistake #2: Assuming today’s negative headlines make it a bad time to investMistake #3: Focusing too much on the short termCapital Group's Guide to Market Recoveries provides expanded insight and detail on the above Facts about Market Recoveries and Mistakes to Avoid. Download the Capital Group's full Guide: Capital Group - Guide to Market RecoveriesTalk to your Nelson Securities Advisor to review your Portfolio: 800-345-7593 Two views of the same investment tell a very different storySource: Capital Group, Standard & Poor’s. Short-term view represents the S&P 500 Index and reflects monthly total returns from 6/30/13 through 6/30/23. Long-term view represented by a hypothetical $10,000 initial investment in the same index from 6/30/13 through 6/30/23.Past Performance is No Guarantee for Future Results Financial Insights... Is a Good CD RateToo Good to Be True? Hartford Funds points out that "Historically, even the most generous CD rates have often been outpaced by other investments." Today's CD rates are attractive, but there is reinvestment rate risk. Read Now Recoveries have Rewarded Patience Investing is a process not an event. Vanguard illustrates the Four stages of a market cycle. Successful long-term investors navigate the full market cycle with patience and resilience, rather than being reactionary to short-term challenges. Read Now Building a Foundationfor the Next Generation The MFS Heritage Planning Series is valuable for investors across a multitude of topics that "keep you up at night." Building a Financial Foundation for the Next Generation is a powerful guide to pass on to your children or grandchildren to help them take advantage of their greatest asset: TIME. Read Now All Content is CLIENT APPROVED. Most brochures, guides, and presentations, are in PDF (Adobe Acrobat Reader), Microsoft PowerPoint, or video formats, which may require downloading the applicable program or player to view. Mutual Fund & Annuity Center Our Direct Mutual Fund and Annuity Models are supported 100% Online. Click on the Model Portfolio Allocations Button below to access our Portfolio Allocations page. Password: 1029Set up an appointment today with your Nelson Securities, Inc. Representative to review your investment portfolio.800-345-7593NOTE: Direct Mutual Fund and Annuity Models are Updated Semi-AnnuallyWAA Fall 2023: Model Portfolio Allocations Q3-Q4 2023 (Updated July-23) Model Portfolio Allocations Investor Note Mutual Fund and Variable Annuity investment strategies, which include investing in specific sectors, foreign securities (both developed and developing markets), high yield securities, or small and medium sized securities may increase the risk and volatility of the funds/sub-accounts. Changes in interest rates may affect the performance of fixed income (bond) funds; if rates increase, bond values decrease and vice versa. Investors should consider the investment objectives, risks, and charges and expenses of the Mutual Fund and/or Variable Annuity carefully before investing.The Mutual Fund prospectus (and summary prospectus, if available) and Variable Annuity prospectus contains this and other information. Please read carefully before investing. A Mutual Fund prospectus and Variable Annuity prospectus and contract can be obtained by calling your Nelson Rep at 800-345-7593 or the Mutual Fund and/or Annuity company directly. Publisher: Nelson Securities, Inc.The WEALTH ASSET ADVISOR is published quarterly by Nelson Securities, Inc., a Registered Investment Advisor. All rights reserved. It is a violation of U.S. copyright laws to duplicate or reproduce any article or portion of this publication without the written permission of the publisher.Information and historical market data contained within this newsletter are taken from sources we believe to be reliable but, we can not guarantee its accuracy. Nelson Securities, Inc., or the publisher, will not be held responsible for actions taken based wholly or partially on information contained herein. Recommendations are of a time-sensitive nature and not a substitute for a comprehensive plan for investing. Each investor must consider suitability with regard to risk prior to investing.