Higher for longer settles in

Hi, I'm Jim Smigiel, SEI's Chief Investment Officer, and over the next few minutes I will provide a brief overview of the global financial markets and our perspective on them. While inflation and rising interest rates have been concerns all year, this didn't seem to sink in for many investors until the closing days of September when the Federal Reserve met to discuss monetary policy.

While the Central Bank delivered a pause in its ongoing series of interest rate hikes, its dot plot of expectations for the future told a more restrictive story. First, it implied that there may be one more hike in store for this year. Second, its policy rate estimate for the end of 2024 was revised up to 5.1%. This signal to markets that rates could remain elevated for longer than anticipated. While equities have been resilient so far this year, the fed's higher for longer projection drove stock prices down.

The market finally seems to be getting the message that higher interest rates will increase companies' borrowing costs and erode the value of future earnings. U.S. stocks, represented by the S&P 500, fell 3.27% for the quarter. Global markets followed suit, with the MSCI ACWI Index dropping 3.4%. These developments are consistent with what we've been saying, namely that in order to tame inflation, there is likely to be at least one more rate hike this cycle, and that the Fed's idea of higher for longer may be higher and longer than markets had anticipated.

Moving on to the bond market, since the end of June, U.S. treasury rates have risen across the yield curve with longer data maturities seeing the most pronounced moves.

For example, in the final week of the third quarter, 10-year treasury rates hit levels not seen since 2007. This drove down bond prices, as prices and yields do have an inverse relationship. While several factors influence bond yields, we believe that fixed income investors are beginning to take the fed's higher for longer message to heart as well. Given current market conditions, we remain cautious on equities, preferring a broader, more diversified exposure among large companies, and an underway to the so-called magnificent seven, tech giants like Apple, Meta and Nvidia, as well as other top tier growth names that have higher interest rate sensitivity. We believe that broader diversification across asset classes, sectors, and geographies is a better strategy than just chasing the winners.

On behalf of everyone at SEI, thank you as always for your trust and confidence.