Review
Uncertainty over Federal Reserve policy and the potential effects on the economy weighed negatively on the markets during the third quarter of 2023. Although July continued the strength we saw during the second quarter, the S&P 500 ended the third quarter down almost 4%.
There were silver linings as corporate earnings were stronger than expected and inflation was on the decline. However, the rhetoric from Federal Reserve officials was they expected inflation to stay above their 2% target longer than anticipated. Thus, spreading concern to the market rates would remain higher for longer and more interest rate hikes may be warranted.
Outlook
By the fourth quarter of the year, we had expected inflation to be lower and Federal Reserve policy to begin shifting towards an easing cycle. That has not happened as interest rates have continued to rise in all areas and the yield curve is still inverted. With interest rates still higher, there is concern the economic data will begin to weaken and the hope of a “soft landing” has been put into some doubt.
The consumer has remained resilient, but there is uncertainty as to whether higher interest rates will begin to crack consumer spending and increase the odds of a recession. October is historically one of the worst months of the year and has held true to that pattern.
We believe the Fed is done raising rates and any confirmation of their guidance to that regard would likely lead to a drop in US treasury bond and mortgage rates. If that scenario holds true, investors will begin to add to their bond allocations as an alternative to the large amounts of money sitting in money market and short-term fixed income investments.
Although the likelihood of new all-time highs for the equity markets in 2023 seems unlikely, we feel as though the markets are in an over-sold condition and expect to see positive returns heading into year-end.
As always, I stress that in this ever-changing political and economic environment, sensible diversification is the key to weathering market uncertainties.
Jason M. Vavra, CPA, PFS
Email: jvavra@vcm-wealth.com Website: www.vcm-wealth.com Twitter: @VavCap
Disclaimer
The information contained herein is not considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Past performance is no guarantee of future results.
