Chalten Investment Review – Q3 2023

Welcome to the Chalten Investment Review for Q3 2023.   After strong gains during the first half of the year, global equity markets were lower in all regions during Q3.  Bond returns were also negative during the quarter, with the US Federal Reserve and the European Central Bank raising rates by 0.25% in July and signaling that rates may stay higher for longer.  

Everyone is hoping 2023 market returns will bounce back after last year and, understandably, the downturn in Q3 is making investors and bit nervous for what is in store for the remainder of the year.   Evidence demonstrates that often a big down year is followed by greater than average returns over 1, 3 and 5 year periods.  But what about intra-year returns?   What happens in years that do experience sharp intra-year downturns?  Are they more likely to finish the year in negative territory or will they rebound?   What does the evidence tell us? 

Looking at US stock market returns, intra-year declines ranged from -3% in 2017 to -49% in 2008.  Many years with large intra-year declines saw positive annual returns.  In fact, in 17 of the last 20 years, US stocks ended up with gains for the year.

Russell 3000 Index returns, with steepest declines within each year, January 2003–December 2022

Source: Dimensional Fund Advisors

Volatility is a normal part of investing. Tumbles may be scary, but they should not be surprising. A long-term focus can help investors keep perspective.

Does inflation hurt stock market returns?  Not necessarily…

Investors have also been asking us whether stock returns will suffer if inflation keeps rising or remains high.   Looking at the last three decades of (US) stock returns does not show any reliable connection between periods of high (or low) inflation and stock returns.  Stock returns can be strong, weak, or in between when inflation is high.  For example, returns were relatively strong in 2021 but poor in 2022.  Twenty-two of the past 30 years saw positive stock returns even after adjusting for inflation.  Over that period, the S&P500 posted an annualized compound return of 7.0% after adjusting for inflation.  So, history shows that stocks tend to outpace inflation over time – a valuable reminder for investors that are concerned about rising prices!  Keeping ahead of inflation is one of the reasons we invest!

Source: Dimensional Fund Advisors

Q3 Market Review    

In the US, stocks fell over the quarter.  Federal Reserve policy-makers forecast interest rates (known collectively as the “dot plot”) and current forecasts seem to indicate higher interest rates for longer.   Employment remains robust although corporate spending indicators seem to indicate that the economy might be starting to cool.  The European Central Bank raised rates in July and again in September and stocks fell during the quarter.  Perhaps investors feel that higher rates might negatively affect economic growth.  However, inflation hit a two-year low which might signal an end to further rate rises.  The Bank of Canada raised its policy rate by 0.25% in July to 5% and kept it steady with their September policy announcement.  

In Asia, stocks in Japan and the rest of the region declined over the quarter with many commentators citing fears over Chinese economic growth.  Emerging markets stocks started Q3 strong but fell off by the end of the quarter, finishing better than developed markets but still down.

With increasing rates and the widely held view that interest rates might stay higher for longer, bond yields increased and prices dropped globally.      

In Q3, value stocks bounced back against growth stocks.

  • Total return for the Canadian stock market was -2.2% for Q3 2023 and +3.4% for 2023 year to date. 
  • In the US, the total net return of the S&P500 in Canadian dollar terms was -1.3% for Q3 and   +12.5% for 2023 year to date.
  • The total net return for the S&P Global ex-US BMI Index of stocks outside of the US (in Canadian dollar terms) was -1.3% for Q3 and +5.2% for the year to date. 
  • The Canadian dollar declined -2.1% against the US dollar over the quarter and is up 0.1% in 2023 so far.
  • Total return for Canadian bonds was -3.4% over the quarter and -1.3% for 2023 year to date.  Global bond indices were down during the quarter and emerging market bonds performed worse than did developed market bonds.   

Financial Planning topics of interest

As the year-end approaches here are some things to keep in mind in terms of year-end tax planning:

  1. Tax-loss selling:  if you have capital gains you would like to offset, selling investments in a loss position before year end will allow you to deduct those losses against your gains for this tax year.
  2. TFSA:  if you plan to withdraw funds from your TFSA in the near future, it makes sense to do so before the end of the year as any withdrawals will be added back to your contribution room at the beginning of 2024.  If you wait until January to withdraw, the amount will not be added to your contribution room until 2025.
  3. RRSP/RRIF:  if you turn 71 this calendar year you are required to convert your RRSP into a Registered Retirement Income Fund (RRIF).  You should make any final RRSP contributions before the end of the year (if desired) and be sure to set required minimum RRIF withdrawals based on the age of a younger spouse if relevant.
  4. First Home Savings Account:  this new account allows qualifying individuals to contribute $8,000 per year with a lifetime limit of $40,000.  Even if you don’t plan to contribute this year but think you might next year it’s worth opening the account this year as you’ll immediately accrue $8,000 of contribution room which will carry forward and be added to next year’s contribution room.
  5. Income splitting loans:  interest on these loans (for example spousal loans) is due by January 30, 2024.
  6. RRSP contributions: you have until February 29, 2024 to make contributions that can be deducted against 2023 income.


In closing, we remind everyone that volatility is normal and large intra-year drops happen often and shouldn’t be surprising.   Markets also still tend to reward investors during times of inflation.  Stick with your plan and you’ll give yourself the best chance of having a positive long-term investment experience!