Perspective :

Third Quarter 2023 Capital Markets Perspective

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Interest rates higher for longer?

In September, markets reflected the impacts of aggressive interest rate tightening by the Federal Reserve over the last eighteen months. During their September meeting, the Fed held rates steady as widely anticipated but indicated another rate hike before year-end remained on the table. If the Fed goes through with an additional hike, it will make a smooth dozen since they started in March 2022.

The Fed’s outlook and statement reflect an economy that continues to grow and keeps the Fed confident in its continued fight against inflation. Market participants are taking the Fed at its word as many prepare for the possibility of “higher for longer” interest rates.  During September, the yield on the 10-Year Treasury Bond increased from 4.18% on September 1st to 4.59% by the end of the month. This rate was at 1.63% at the start of 2022. These are material increases in a reasonably short period and explain much of the recent challenging stretch for fixed income investors. Conversely, today’s higher interest rates reflect yields not seen in decades and reward those with a preference for income. Yields on short-term investments have moved from “return of capital” to “return on capital.”

It was a challenging month and quarter for capital markets, with the start of the automotive strike, an increase in energy prices, and talk of a government shutdown that did not happen. As always, there are things to worry about, and the U.S. economy appears to be on a solid footing for now.

What happened in the markets during the quarter?


The aforementioned “higher for longer” uncertainty around interest rates also impacted stocks – especially technology shares. Rising yields can take a hard hit on this sector due to their long-dated expected future profits that are worth less than the risk-free returns from holding Treasuries to maturity.

The S&P 500® Index, up 18.7% year-to-date through August, lost 3.3% for the quarter and now stands at +13.1% year-to-date. The U.S. Technology sector (largest by weight) was down 5.6% for the quarter. The best-performing sector was Energy, up 12.3%. Small cap stocks, down 5.1% for the quarter, lagged large cap. And small caps are up 2.4% for the year, trailing large caps by about 11%. Any broad exposure relative to large cap was detractive.

The pullback in non-U.S. stocks was similar to U.S. stocks for the quarter, with the MSCI EAFE Index down 4.1% and the MSCI Emerging Markets Index down 2.9%. Due to a strong fourth quarter of 2022, MSCI EAFE has an attractive one-year return of 25.7%, leading the S&P 500 by 6% over the last twelve months.


The bond market looked to the possibility of higher for longer in terms of interest rates. The yield on the 10-year government bond increased by 0.41% during the month. An increase of that magnitude left a mark on bond investors, with the bond market losing 2.5% in a single month with a quarterly return of -3.2% and a year-to-date return of -1.2%. Investment grade corporates lost 3.1%, and municipal bonds, which lost 7.3% in September alone, lost 11.8% for the quarter.

Corporate high-yield bonds fared “less bad,” down 1.2% for the month and an attractive +5.9% year-to-date.


To the surprise of no one who visited a gas station of late, the Energy Sector within Commodities was the leader, up 4.4% for the month and 19.6% for the quarter. WTI Crude led this increase, up 9.9% for the month and 31.8% for the quarter. The broad Commodity Index was actually down 0.7% for the month and up 4.7% for the quarter.

Agriculture and Precious Metals were negative for the quarter. Commodities remain volatile, with a negative annualized return of -0.8% over the last ten years.

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. 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.

Return expectations for emerging market equities and international small caps not only continue to remain near the tops of their respective 20-year ranges, but they’ve improved over the past year. Expectations for 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 and REITs remain near their 20-year lows.


Our market cap positioning in the U.S. and overseas was a headwind to absolute and relative performance. Emerging market equity exposure hurt as well. On the fixed income side, our exposures to leveraged loans and high yield bolstered absolute returns, and our overweight to the former helped relative to benchmarks. Managed Futures were up for the month and quarter and a welcome diversifier to the pullbacks witnessed in most equities and bonds. All of the funds used were positive for the month and generally additive for the quarter. Long-term Treasuries were down for the third month in a row, detracting from overall performance.

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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 Nasdaq 100 A stock market index made up of 101 equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock exchange.
International Equity MSCI EAFE An equity index which captures large and mid cap representation across 21 Developed Markets countries around the world, excluding the US 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 greater than 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.
Municipal Bonds Morningstar US Municipal Bond Measures the performance of fixed-rate, investment-grade USD denominated tax-exempt debt issued by U.S. state, U.S territory, and local government entities with maturities greater than one year.
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.
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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