Q3 2023 Market Update

November 7, 2023

Q3 2023 Update – Rates Matter

Some very interesting things are happening under the market surface this quarter. Interest rates are finally having a meaningful impact on asset prices and parsing companies based on real fundamentals in a way we have not seen in a long time. Let me start by focusing your attention on a key disconnect worth discussing (highlighted):

Second Quarter and YTD Market Return

Index YTD Q3
S&P 500 Total Return Index 13.07% -3.27%
S&P 500 Total Return Index Equal Weight 0.31%  -5.31%
All Country World Index (ACWI) 8.82% -3.72%
Aggregate Bond Index -3.04% -3.99%

*Data provided by Y-Charts

The S&P 500 and S&P 500 equal weight are comprised of the same group of companies; so why such a large disconnect between the returns? As the name implies; the latter is equally weighted with the roughly 500 companies making up around .20% each. Contrast this against the market cap weighted (company size weighted) index that is the standard S&P 500 and you can draw a simple conclusion that the largest companies in the index must be doing very well compared to the smaller ones. This phenomenon has created a very bifurcated market of haves and have-nots. But why?

The answer can be seen very clearly in the following statistic:

  • YTD Return for S&P 500 companies that have no net debt = 12.94%
  • YTD Return for S&P 500 companies with net debt = 0.14%

Companies with debt burden have greatly underperformed cash-rich companies during the rising rates environment of 2023. It’s simple really; we are no longer in a quantitative easing environment (QE) instead we are in a quantitative tightening environment (QT) and companies with real earnings power and healthy balance sheets hold a large advantage!

Fundamentals Win

In the long run, fundamentals will win out. The 2 biggest fundamentals we look at are:

  1. Organic Profit (not reliant on debt or outside primary business activity)
  2. Debt levels relative to cash flows

If the goal of investing is to make money long-term in line with or above inflation; then the math becomes self-explanatory. Own companies (or a combination of companies) that can survive a long time and deliver cash to shareholders. Lower debt or no net debt generally increases a company’s survival timeline. The profit that is generated directly from the business’s primary activities and does not rely on debt also increases the timeline by making the business self-reliant and not at the whims of debt market interest rates.

This year we have seen interest rates rise rapidly. This increase hurts companies reliant on debt. The more reliant a company is on debt the more risk they face as rates rise. For the past 14 years companies have enjoyed very cheap money and the ability to roll over debt at fairly cheap levels. We are now seeing a clear bifurcation in the marketplace. Companies that can survive and thrive with little to no new debt stand to take market share from companies that need the debt and will be forced to pay higher rates. The market is sorting this out in real-time. Many companies have operated and thrived from the cheap money provided by low rates. These companies will likely revert to a more fair valuation with some likely to disappear completely. As the economy softens and consumer spending retraces back to normal levels or below we would expect healthy companies to be given a good opportunity to gather more market share. As this sorts out we expect the market to trudge along below the highwater marks for a bit longer. However, we think now is a very exciting time and much more compelling than the peaks of 2021 for long-term-focused investors. The strong cash-flowing companies can capitalize on this environment and capture opportunity over the next couple of years that might pay off well for longer-term investors focused 5-10 years out.

Evergreen Philosophy

Our philosophy and approach to debt can be summed up very well by Warren Buffet

I do not like debt and do not like to invest in companies that have too much debt, particularly long-term debt. With long-term debt, increases in interest rates can drastically affect company profits and make future cash flows less predictable. 

This is a key principle we operate by when constructing sustainable portfolios. It is easy for investors to forget the danger of debt-laden companies when rates are cheap but going forward we expect the market to reward the prudent investors who avoid the folly of debt. We shall continue with this focus and continue looking for opportunities that start with healthy cash and cash flow!

As always THANK YOU!  Our success together is an equal part great team, great advisors, and great clients. We feel extremely blessed to get up every day and do exactly what we love doing. If we did not serve such great families, we would not love what we do nearly as much. It remains a tremendous honor to steward your hard-earned assets and continue helping you meet your long-term objectives. Don’t hesitate to reach out if you have any questions or concerns.


(1) Data reported by Y-Charts Data, www.ycharts.com.

Index results such as the S&P 500, S&P 500 Equal Weight,  Aggregate Bond Index, and All Country World Index do not reflect advisor or management fees and expenses and you cannot typically invest directly into an index. Our reporting using Y Charts for SPY, RSP, ACWI, and AGG does reflect the ETF securities and could be invested. Evergreen Wealth Management, LLC is a registered investment adviser.  The information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.