From the CIO’s Corner – Q3’2023 Performance Review: Is the Free Money Gone Forever?

Q3 proved to be a difficult quarter for traditional assets, both equities and bonds, with the 60/40 portfolio being down about 3%. At current market prices, the bond market looks on track to finish the year negative for the third year in a row, something that hasn’t happened since 1871, when the historical data begins. The main source of concern for investors was the US Federal Reserve communicating that they could hold rates higher for longer in their attempt to fight inflation.

While the headline inflation figures have moderated this year, with the CPI going down from 7.1% to 3.7%, the Fed’s focus has been on the core PCE index as the benchmark for its 2% inflation target, which has been more stubborn at 3.9%.  Sure, there is a lag between the central bank hiking rates and its impact on the economy, but the recent rise in energy prices has reflected in a CPI that has been creeping higher for 3 months, something that is most likely of concern to the Fed.

Also of concern to bond investors is the dysfunction in Washington, D.C. Typically, what happens in Washington stays in Washington, but the recent events around pushing back a government shutdown resulted in the ouster of the Republican Speaker of the House. The big question is how Congress will be able to coalesce a budget agreement when the Republicans are so divided to begin with and struggle to elect a new Speaker of the House. What unfolds over the first half of the 4th quarter will be front and center on most investors’ radars. As the political chaos contributes to the bond market volatility, some of it could spill over and affect equity markets.

It’s also worth noting the larger issue looming on the horizon: the structural budget deficit. When rates were close to zero, the debt servicing expense was manageable even though the budget deficit grew ever larger. But what happens now that the total public debt hovers around 120% of GDP and interest rates have gone up across the curve? The CBO forecasts that by 2024, interest payments will double from their level in 2021 – and probably reach a multi-decade level. The chart below depicts the total public debt and the cost of servicing that debt as a percentage of GDP; how high will it go?


It is clear that the US Treasury Department will advocate for ‘lower, sooner’, and thus the four scenarios which looked probable at the beginning of the year still look relevant today:

  • The “soft-landing” which the Fed is looking to engineer, and was the prevalent scenario until this summer;
  • A “hard landing” which would quickly bring the recession that has eluded many economists;
  • “Stagflation” where inflation is persistent, causing the Fed to keep rates elevated at the cost of economic growth, and seems unlikely with the recent progress on the inflation front;
  • The Fed tolerates higher inflation for a while so as to not sacrifice growth and full employment, and is a scenario that is increasingly likely.

In the context of choppy market volatility, CTAs, especially trend followers, have performed well. After a difficult first half of the year, and after notching a strong positive gain in September, CTAs and trend followers are positive for the year, with the SG CTA Index up 2.01% YTD and the SG Trend Index up 1.29% YTD. We continue to advocate that investors must be vigilant. While the recent yields in bonds are looking attractive by recent historical standards, investors should not forget that the longest inflation-adjusted drawdown in bonds lasted almost 45 years, from 1941 to 1986. It is therefore prudent to run a well-diversified portfolio of risk-exposed assets and risk-mitigating strategies, like macro and CTA strategies, which may help navigate the current uncertainty and mitigate any potential resurgence of volatility.

Please contact us to discuss the potential use of risk-mitigating strategies in your portfolio.

For further information about the Galaxy Plus managed account platform, please contact: Marc Lorin, CIO, (630) 566-4521,

About Galaxy Plus:

Galaxy Plus is a managed account platform for managers and investors providing an institutional level, “managed account like” experience in alternative assets. The Galaxy Plus Platform is an innovative solution with a flexible structure, increased efficiency, lower costs, increased risk mitigation, and a highly controlled and secure infrastructure.


The author’s point of view reflected in this article should not be construed as investment advice.  The CTA strategies noted herein, some of which may be available on the Galaxy Plus platform, do not represent an endorsement of a particular CTA or strategy.  The information presented is for illustrative purposes only and is based on the opinion of the author as a result of recent market conditions and does not represent the view of New Hyde Park Alternative Funds, LLC.