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Effective Date:  September 30, 2023


The third quarter stock and bond markets were pressured by rising interest rates and concerns about a government shutdown. Interest rates on the 10-year US Treasury bond increased from 3.8% to 4.6%, with most of the hike occurring after the Federal Reserve's policy meeting on September 20th. Although the outlook for the remainder of the year remains positive, it is at a lower confidence due to the heightened possibility of a monetary policy error by the Fed. Consequently, our plan for your portfolio involves rebalancing later this year. This will entail selling US equity exposure and increasing bond exposure to align your portfolio closer with its long-term asset allocation target before the start of the next year.


                                  S&P 500

                Russell 2000

MSCI EAFE International

MSCI EM Emerging Markets

Barclays Aggregate Bond

10 YR Treasury Yield







Despite a positive start in July, markets faced declines in August and September due to the upward trend in interest rates. The notable increase in the 10-year US Treasury rate has had significant implications by affecting mortgage rates, corporate borrowing costs, and interest payments on the national debt. It is worth noting that interest rates are currently at their highest level since 2007. The rise in interest rates can be attributed to two primary factors. First, the Federal Reserve has been raising short-term interest rates over the past 18 months and signaling further increases in 2024, as they did during their most recent September meeting. Second, there's a decrease in demand for government bonds. The US government has issued a substantial number of bonds to finance its high deficits (expenditures exceeding revenues). Historically, the major buyers of US Treasuries have been the Fed, US banks, and foreign governments, which has helped keep interest rates low despite the high deficits and debt levels. However, all three of these major buyers have substantially reduced their purchases of new bonds, contributing to the increase in yields. 




Market indicators

Investor sentiment

US Economy

Corporate Earnings


Market momentum


US equity valuations


Geopolitical & Ukraine war

Monetary policy

Interest rates

We have implemented several changes to the market indicators table above. Investor sentiment was moved to the positive outlook and market momentum to a neutral stance, reflecting the increase in negativity (a contrarian indicator) and recent market declines. Both of these factors could contribute to market stabilization in October, potentially leading to a positive performance toward year-end. Furthermore, we upgraded the assessment of the US economy and earnings to a positive outlook. A year ago, markets were pricing in a recession for 2023 and a significant decline in earnings. However, despite economists and investors still harboring concerns of an impending recession, the economy has shown remarkable resilience. Excluding energy stocks, earnings are growing at a rate of 6.7%. It is possible the economy is accelerating, although we anticipate some moderation as higher interest rates begin to impact economic conditions. Finally, we downgraded our assessment of interest rates from neutral to negative. While higher interest rates can be beneficial for many investors, as they yield higher returns on their bond allocations, we believe that interest rates have risen excessively, posing a negative impact on the economy. The risk of the Fed going far has increased, which could potentially result in a recession in 2024.

We maintain a positive outlook for the markets for the remainder of the year, driven by the ongoing moderation of inflation and quantitative indicators. In summary, we believe the recent surge in interest rates and market sell-off represent overreactions. On September 29th, the Federal Reserve's preferred inflation indicator, PCE, was released for August. According to Nick Timiraos of the Wall Street Journal, core inflation in August stood at 2.2% when annualized over the last three months of data, closely aligning with the Fed's 2% target. Remarkably, inflation for goods was actually negative at -2.6%. Should inflation remain at its current levels, the Fed may refrain from further interest rate hikes, despite keeping the door open for future increases. In the event that the Fed concludes its interest rate hikes, it is likely that both stock and bond markets will experience a rally.

We consistently emphasize the value of quantitative indicators in providing insights into markets, as they often surpass mere opinions in their effectiveness. It's important to bear in mind that past performance does not guarantee future results. Drawing from research conducted by FundStrat and Ryan Detrick, historical data since 1950 reveals that when the market shows a gain between 10% and 20% at the end of September (similar to this year), it has been positive in 17 out of 20 instances (84%), with an average gain of 5.1%. Additionally, when the market experiences a decline of over 1% in both August and September (as is the case this year), it has been up in 12 out of 13 instances (92%), with an average gain of 7%. These statistics underscore the historical strength of the fourth quarter and the potential for a reversal of negative investor sentiment, a trend that could again manifest in 2023.

While we hold a positive outlook for the remainder of this year, we exercise caution regarding next year due to the upcoming Presidential elections. Unfortunately, elections have increasingly become a source of volatility and market risk. We recommend investors adhere to long-term asset allocation strategies next year and consider adjusting, if necessary, once the election results are fully known.




Portfolios are strategically positioned for an ongoing recovery, with an overweight allocation to US equities and underweight positions in bonds, cash, and real estate. The plan is to rebalance your portfolio when the markets recover from the decline experienced in 2022 or before the end of this year, whichever occurs first. We recommend portfolios be aligned closely with target asset allocations next year, especially as markets factor in the upcoming Presidential and Congressional elections. We also consistently rebalance portfolios in response to deposits or withdrawals from your account, with dividends and interest reinvested upon receipt.

Additionally, in October, we will be implementing a minor adjustment to the cash management and short-term bond position to enhance portfolio trading efficiency. Over the past two years, we have utilized the Schwab Value Advantage fund, a money market mutual fund, for a portion of the cash and short-term bond allocation. This choice has been advantageous due to its consistent returns of 3-4% with minimal volatility. However, as this product is a mutual fund, it introduces friction in trading, given that mutual funds have a different settlement process than ETFs, which comprise the rest of the portfolio. Consequently, we plan to transition this allocation to BIL, an ETF exclusively investing in US Treasury bills with maturities of 89 days or less, thus categorizing it as a cash equivalent. This ETF exhibits minimal volatility and offers a return profile similar to the money market fund, while simplifying trading protocols. This change carries no associated cost or tax implications.

Brian West, CFA, CPA
Chief Investment Officer
(515) 284 1011
111 East Grand Avenue, Suite 412
Des Moines, IA 50309
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