The potential “soft landing” that showed promise at mid-year has begun to look more uncertain. Inflation, coupled with the Fed’s response, was the top economic story again 3rd Quarter. Headline inflation numbers increased and garnered media attention while the core inflation reading (which excludes the more volatile food/energy prices) fell on a year-over-year basis. This means the overall trend remains positive, but the mixed data drove the Fed to project another rate hike before year-end and a reduced likelihood of cuts next year.
Markets responded quickly and dramatically to Chair Powell’s comments, recalibrating prices across the board to reflect the new assumptions for the coming 12-18 months. This led to interest rates spiking and the 10-year Treasury reaching its highest yield in 15 years. It also resulted in a drop in stock prices, causing the quarter to end negative for all major market indexes.
Factors outside of interest rates provided little ballast, with numerous headwinds arising in the short-term:
- The US government shutdown could again become a possibility in mid-November. The last-minute action to avert an October 1 shutdown only provides an additional 47 days for Congress to come together on a new funding bill. If a shutdown occurs, the economic consequences will grow relative to the length of the shutdown.
- Student loan payments commence once again in October, reducing funds available for discretionary spending for millions of people.
- Large labor movement actions, including the United Auto Workers unprecedented action of striking against all big three automakers, could have a broader impact that slows the economy and negatively impacts the inflation fight.
These factors and others, such as a recent rise in gas prices, have all led to a drop in consumer confidence, which could negatively impact the upcoming holiday spending season.
Despite all those headwinds, there remains space for cautious optimism around investments. All the aforementioned concerns are well known by the market, leading to a lower likelihood of negative surprises and increased potential for positive ones. The market is also moving into what has historically been one of its strongest periods of the year. Since 1945, the last 100 calendar days of the year have been positive 77% of the time, with a median gain of +4.1%.
The continued rise in interest rates will be a boon for conservative investments. In the short-term, money market and CDs are yielding over 5%. While those rates will likely start to decline next year, fixed-income/bond investments are locking in similar yields with longer maturities, providing the potential for strong returns in the coming years.
As always, thank you for your continued trust and please let us know of any questions that may arise.
The PWM Team
