October Economic Update
Market Summary
The recent market pullback continued last month in light of renewed concerns regarding higher interest rates, inflation, weakening consumer demand, and economic concerns overseas in China. The S&P 500 Index retreated -4.87%, the Nasdaq Composite lost -5.07%, the Dow Jones Industrial average slipped -3.50%, and the Russell 2000 small cap index fell -6.03%. (1)
Interest Rates and Inflation
Much of the market narrative last month revolved around the sharp rise in longer-dated US Treasury interest rates with the 10-year Note rising to its highest level since 2007. While many factors dictate longer duration rates, one factor was the Consumer Price Index rising for the second consecutive month in a row, breaking the multi-month disinflationary trend that began last August. Much of the recent re-inflation we have seen is due to the sharp rise in oil and gasoline prices over the past few months. With inflation holding above the Federal Reserve’s 2% target, the market has begun to price-in higher rates for a longer period of time. (2)
The Federal Reserve
The Federal Reserve held short-term interest rates unchanged at their most recent meeting in September with the Fed Funds Rate remaining between 5.25-5.50%. They also issued their Summary of Economic Projections which showed expectations for higher rates will prevail into next year and inflation not reaching their 2% objective until year-end 2026. (3)
China Economic Woes
Many economists and investors have been keeping a close eye on the economic conditions in China as the world’s second largest economy grapples with a slumping real estate market. Over the past decade, large housing developers funded with pre-payment from home buyers fueled the real estate sector for the nation. More recently in the past couple of years, an economic slowdown ensued (largely due to prolonged COVID-19 lockdowns) which caused housing prices to decline. The pricing slump exposed a fragile housing sector with home builders not being able to complete the construction of homes which were prepaid but never built. While the extent of the crisis is somewhat unknown, the calls for government intervention to create financial stability continues to grow as investors and home buyer confidence wanes.
Looking Forward…
Seasonable market weakness is common during the months of August and September and at times can extend into October. While the recent pullbacks are not anything out of the norm, there are some potential headwinds to consider into the beginning of next year. Recent data such as personal savings, credit card balances, and personal spending point to some weakening with the US consumer as the higher cost of living from inflation begins to take a larger toll. Considering 70% of the US economy is driven by consumer spending, these trends will be watched closely into the latter part of the year as the holiday season approaches. October also begins another round of quarterly earnings reports and analysts will be looking for any signs of consumer strength or weakness reported by US companies.
TD Ameritrade & Charles Schwab Merger
After last month’s merger, please let us know if you have any questions or need assistance with accessing your accounts online. Do not hesitate to reach out to Scott Schneider at 952-857-2416 or via email at Scott@BarringtonCap.com with any questions.
Monthly Financial Tip:
Your emergency savings funds should be large enough to cover at least six months of expenses in cash.
Citations:
1. WSJ.com, Sept 30, 2023
2. Investing.com, Sept 13, 2023
3. FederalReserve.gov, Sept 20, 2023
Disclaimers:
This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
