Perspective :

November 2023 Capital Markets Perspective

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Relentless rise in rates takes its toll

October was not kind to investors, as every major asset class in which we invest was in the red, save for commodities, which eked out a 27-basis point gain. Credit the steady rise in the 10-year Treasury yield, which briefly surpassed 5% on October 19th, for the carnage in capital markets. On the plus side, the rise in rates has widely been viewed as doing the Fed’s job for them and has effectively squashed any chance for hikes in the coming months, despite Chairman Powell’s refusal to declare victory. Futures markets only put a 5% chance of a hike in December and a 9% chance in January, and the probabilities go down from there.

And why the continued rise in rates? Both economic strength and an increase in the term premium, or the extra compensation that investors demand for holding longer-dated investments have been widely cited. On the economic front, third-quarter real Gross Domestic Product (GDP) didn’t disappoint, coming in at a seasonally adjusted 4.9% rate, which was more than double that of the second quarter, according to the Commerce Department. Not one of the components of GDP was materially negative, with consumer spending, inventories, and government spending accounting for the large gain. Further, real personal spending accelerated at the end of the quarter, coming in at 0.4% for the month of September (a 4.7% annualized rate), surprising to the upside. This is at the expense of yet another decline in the savings rate, which means that the mighty consumer could be getting winded. However, with still solid, albeit cooling job gains and an estimated 9.6 million job openings at the end of September, it’s probably too soon to call a time of death on the shopping frenzy.

Across the pond lies an entirely different situation. The European Union’s statistics agency recently reported that GDP for its 20 members fell by an annualized 0.4% during the quarter. Given that reality and the fact that Eurozone Consumer Price Index (CPI) has fallen to 2.9%, the European Central Bank kept rates unchanged at its last meeting and the market does not foresee any additional increases. In fact, deep cuts are being priced in for 2024 and 2025.

What happened in the markets in October?


If you were invested in equities during the month, you felt the pain, but how much depended on where you had exposure and to what extent. Small caps in the U.S. and overseas got whacked the hardest, losing 5.7% and 5.9%, respectively, as investors worried about the adverse impact of higher interest costs. While large companies have been earning more interest income than they’ve been paying in interest expense, the same is not true for smaller companies, which have seen their financing costs spike.

International developed markets fared better, but still lost over 4%, while emerging markets declined by 3.9% and U.S. large caps fell by 2.1% as earnings season began to wind down. On that note, with about 64% of companies reporting, operating earnings were up 1.1% from the prior quarter, and on a trailing 12-month basis they are about 5% higher than they were at this time last year. However, while the earnings recession has ended, corporate earnings guidance has been weak, and analysts’ earnings downgrades have exceeded upgrades for seven weeks in a row. According to JPMorgan, only about 25% of S&P 500 companies have been revising earnings per share (EPS) guidance higher.


The fallout from rising rates was widespread. The only fixed-income category that held up was leveraged loans, which shed 1 basis point. Long-Term Treasuries suffered mightily, falling by almost 5%, while core bonds were down 1.6% and investment grade corporates returned -1.9%. High yield bonds, which are less interest rate sensitive, retreated by 1.3% as spreads widened by about 42 basis points.

Towards the end of the month when rates peaked, Greek 10-year bonds were yielding less than their U.S. counterparts. If you recall the PIIGS crises, that one should be a bit of a shocker. I’ll add that at month end, TLT, which is in its 37th month in drawdown, was trading at a price last seen in 2007. Indeed, battle scars abound among fixed income investors, but as the Fed is likely done with rate hikes and inflationary indicators are heading in the right direction, perhaps, as Barron’s recently wrote, “It’s Time to Stop Crying About Bonds and Start Buying Them”.


While commodities as a group finished slightly in positive territory, as always there was a wide range of outcomes below the surface, because, as surprising as it may be, wheat and platinum have little in common.  Industrial metals (-4.1%) and energy contracts (-2.7%) were the losers. Oil was hit especially hard, with spot Brent Crude off by 8.3% despite the conflict between Israel and Hamas, on signs of increased production by OPEC and the United States. On the plus side, precious metals served in their typical global-chaos-safety-net role, gaining 6.3%, and the agricultural complex advanced by 2.4%, with all its sub-components except cotton in positive territory.

How are Frontier strategies positioned?


Due to the complexities of attempting to generalize about allocation changes across our Core, Specialty, Tax-Managed, Multi-Asset Income, and Faith-Based Strategies and the additional difficulties of properly conveying how those asset allocation changes flow through to trade level activity, we are instead directing clients to our monthly trade summaries, which describe in detail what trade activity occurred by strategy, and why.

Focusing on our Core Strategies, relative to their long-term asset allocations, which serve as policy portfolios guiding our dynamic allocation decisions, we favor U.S. and international small caps, emerging market equities, managed futures, floating rate loans, and cash/short-term bonds. We are generally underweight U.S. and international large cap stocks, REITs, commodities, and both high-yield and high-quality bonds at the asset allocation level, but differences between the asset allocations and actual exposure at the fund level can and will occur. At the beginning of November, our asset allocation models did shave a bit off equity and managed futures exposures in favor of high-quality bonds.

Return expectations for emerging market equities and international small caps continue to remain near the tops of their respective 20-year ranges. Expectations for TIPS, managed futures, floating rate loans, and T-bills are likewise high relative to history and are also above their year-ago levels. U.S. large caps remain near their 20-year lows, while REITs, which previously shared the same unenviable position have seen their outlook creep higher.


For the month, and focusing on our Core and Tax-Managed Strategies, our conservative to moderate risk-level strategies outperformed their respective benchmarks, while our more aggressive strategies were either on-benchmark or trailing. As for what helped or hurt absolute and relative returns is generally true across all Frontier’s strategies. Specifically, managed futures funds were the star performers in an otherwise bleak landscape; three of the four funds that we utilize in portfolios were in positive territory for the month when just about everything else was down. Bank loans were also additive, performing much better than other fixed income asset classes, while U.S. and international small cap exposure was highly detrimental to performance. Related, our underweight to large caps, compared to their long-term allocations and related benchmarks, was a negative.

Past performance is no guarantee of future returns. Performance discussed represents total returns that include income, realized and unrealized gains, and losses. Nothing presented herein is or is intended to constitute investment advice or recommendations to buy or sell any type of securities, and no investment decision should be made based solely on information provided herein. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for an investor’s financial situation or risk tolerance. Diversification and asset allocation do not ensure a profit or protect against a loss. All performance results should be considered in light of the market and economic conditions that prevailed at the time those results were generated. Before investing, consider investment objectives, risks, fees, and expenses. Frontier may modify its process, opinions, and assumptions at any time without notice as data is analyzed.

Envestnet licenses models from Frontier that are used in investment advisory programs sponsored by Registered Investment Advisers. In such programs, Envestnet acts as the discretionary manager for client accounts in the programs. In many cases, Envestnet manages and implements the models as received from the model provider. The performance information included herein is intended to provide you with a general understanding of how the model has performed when managed by Frontier. However, such performance information is likely to be different from the actual performance you would experience should Envestnet make changes to the models or place trades at different times, and also depending on when your account is incepted and when you make contributions and withdrawals.

Information provided herein reflects Frontier’s views as of the date of this newsletter and can change at any time without notice. Frontier obtained some of the information provided herein from third-party sources believed to be reliable, but it is not guaranteed, and Frontier does not warrant or guarantee the accuracy or completeness of such information. The use of such sources does not constitute an endorsement. Frontier’s use of external articles should in no way be considered a validation. The views and opinions of these authors are theirs alone. Reader accesses the links or websites at their own risk. Frontier is not responsible for any adverse outcomes from references provided and cannot guarantee their safety. Frontier does not have a position on the contents of these articles. Frontier does not have an affiliation with any author, company or security noted within. Frontier reserves the right to remove these links at any time without notice.

Exclusive reliance on the information herein is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions, and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell any securities, commodities, treasuries, or financial instruments of any kind. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal, investment, or tax advice. Frontier does not directly use economic data as a part of its investment process.

Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. The estimates, including expected returns and downside risk, throughout are calculated monthly by Frontier and will change from month to month depending upon factors, including market movements, over which Frontier has no control. They are only one factor among many considered in Frontier’s investment process and are provided solely to offer insight into Frontier’s current views on long-term future asset class returns. They are not intended as guarantees of future returns and should not be relied upon in making investment decisions.

Hypothetical expected returns have certain limitations, are discussed for illustrative purposes only and it should not be assumed that actual results will match the hypothetical expected returns referred to. Unlike actual performance, hypothetical expected returns do not represent actual trading and since trades have not been executed, the results shown may have under or overcompensated for the impact, if any, of certain unforeseen market factors. Hypothetical expected returns, whether back tested or forecasted, have many inherent limitations and no representation is being made that any account will or is likely to achieve the results expected. In fact, there are frequently material differences between hypothetical expected results and actual results achieved. One of the limitations of hypothetical expected results is that they do not take into account that material market factors may have impacted the adviser’s decision-making process if the firm were actually trading clients’ accounts. Also, when calculating the hypothetical expected returns, the adviser has the ability to change certain assumptions and criteria in order to reflect better returns. There are numerous other factors related to the markets in general or to the implementation of any specific investment strategy that cannot be fully accounted for in the preparation of hypothetical expected results, all of which can adversely affect actual trading and performance. Importantly, it should not be assumed that investors who actually invest in this strategy will have positive returns or returns that equal either the hypothetical expected results expected. In addition, performance can and does, vary between individuals.

In reviewing the performance information presented here, we recommend that you consider both the returns generated and the level of risk that was assumed in generating those results. We believe that performance information cannot be properly assessed without understanding the amount of risk that was taken in delivering that performance.

Frontier provides model strategies to various investment advisory firms and does not manage those models on a discretionary basis. The performance and holdings of model strategies may vary from strategies managed by Frontier.

Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.

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U.S. Large Cap Equity S&P 500 Represents US large company stocks.
U.S. Small Cap Equity Russell 2000 A small-cap U.S. stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index.
International Small Cap Equity MSCI EAFE Small Cap An equity index which captures small cap representation across Developed Markets countries around the world, excluding the US and Canada
International Developed Equity MSCI EAFE An equity index which captures small-cap representation across 21 Developed Markets countries around the world, excluding the U.S. and Canada.
Emerging Market Equity MSCI Emerging Markets Captures large and mid cap representation across 24 Emerging Markets (EM) countries.
Investment Grade Corporates Morningstar US Corporate Bond Measures the performance of fixed-rate, investment-grade USD-denominated corporate bonds with maturities over one year.
High Yield Bonds Morningstar U.S. High Yield Bonds Measures the performance of USD-denominated high-yield corporate debt. It is market-capitalization weighted.
TIPS Morningstar US TIPS Represents inflation-protected securities issued by the U.S. Treasury.
Leveraged Loans S&P / LSTA U.S. Leveraged Loan 100 Designed to reflect the performance of the largest facilities in the leveraged loan market.
Long-Term Treasuries Morningstar US 10+ Yr Treasury Bond Measures the performance of fixed-rate, investment-grade USD-denominated Treasury bonds with maturities greater than ten years.
REITS FTSE NAREIT Equity REIT A free-float adjusted, market capitalization-weighted index of U.S. equity REITs.
Commodities Bloomberg Commodity Broadly diversified index that allows investors to track commodity futures through a single, simple measure. The DJ-UBSCISM is composed of futures contracts on physical commodities.



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