Market Commentary | October 2023
Market Struggles and Fed Holds Rates High
September, historically the worst performing month of the year, played out true to its historical pattern with the S&P 500 down a bit over 3%. The pullback still leaves the market up around 12% for the year, though the market remains about 10% below its high, notched before yields began rising in 2022. The recent rally for stocks was halted when the 10-year yield reached 4% at the end of July.
Strong consumer spending and low unemployment have powered the U.S. economy throughout the year and allowed growth to continue despite elevated interest rates. After much optimism around the Fed’s ability to engineer a soft-landing, the Fed’s commitment to higher rates, spurred by the jump in consumer prices in August, has made markets a bit skittish.
Now, heading into the fall, the economy faces various potential challenges including a broader auto workers strike, a lengthy government shutdown (which could still happen after the 45-day reprieve expires), the resumption of student loan payments and rising oil prices. And, there’s still the ongoing war in Ukraine. While on their own, none of these are likely to cause much harm (outside of Russia using nuclear weapons), today’s challenge is their acting together and elevating uncertainty associated with higher rates.
A broad strike would shave off between 0.05 and 0.1 percentage point from annualized economic growth for every week it lasts, according to Goldman Sachs. A partial government shutdown impacting more areas over time would cause problems for many in and out of government. The resumption of student loan payments will impact significant parts of the economy, and rising oil prices causes nearly everyone pain.
Another big area of focus remains, corporate earnings. After suffering through an earnings recession, analysts are growing optimistic about earnings rebounding with many having adjusted their expectations upward. Still, higher rates are starting to affect a broader area of the economy raising uncertainty about corporate America’s profitability.
These factors plus the Fed’s recent signaling around future rates have caused Wall Street’s mood to darken. The Dow, S&P 500 and Nasdaq all suffered consecutive monthly declines for the first time since last September. While fewer analysts and economists expect a recession this year, many project growth to slow sharply with estimates running ranging from 0.5% - 1.3% annualized growth in the fourth quarter. Growth is dropping markedly from an expected 3.1 - 3.5% gain during the third quarter.
On the eve of recessions in 1990, 2001 and 2007, many Wall Street economists wrongly proclaimed the U.S. was nearing a soft landing. This summer’s combination of easing inflation and a cooling labor market again fed optimism among economists and Federal Reserve officials that a soft landing was coming, driving up stocks. But soft landings are very rare precisely because they are so difficult to pull off, which investors seemed to recognize over the past couple months.
The market has performed a bit better for the year than we anticipated, causing valuations to remain high despite the recent pullback. There’s no reason to believe valuations cannot remain elevated, yet higher values leave less room for error and future upward moves. Continued volatility, potentially up and down, is likely for the foreseeable future, which shouldn’t phase long-term investors, but might cause concern for those with shorter timeframes.
- Daniel Wildermuth, Portfolio Manager
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