THE STOCK MARKET
After a surprisingly strong start to the year, the stock markets came back down to earth during the 3rd quarter. Seasonality coupled with higher rates, continued confusing economic data and uncertainty about the Fed’s next move led to negative returns.
RISING INTEREST RATES
Longer-term interest rates continued to rise during the quarter, thanks to several different reasons.
• First, increased energy prices caused an uptick in primary inflation gauges during August.
• Second, the U.S. Treasury continues to dump massive amounts of supply on the financial system.
• Third, the Federal Reserve and Asia have been the buyers of last resort for the last decade, and currently don’t appear to be willing. As a result, there was nowhere for rates to go but up.
BANK CREDIT
Loans and leases in bank credit barely budged during the quarter, thanks to the persistent inverted yield curve. This sluggishness in credit extension has caused the money supply to essentially stall in 2023. Intuitively, this doesn’t bode well for continued economic growth.
CLIMATE CHANGE
No matter where you stand on the climate change debate, there was no arguing the 3rd quarter was a scorcher throughout much of the country, especially the Southeast. Given our energy use during the blistering summer months, it makes one wonder what would happen to the grid if everyone were driving EV (electronic vehicles).
THE PUBLIC VS. PRIVATE SECTOR
From dams collapsing in Libya to massive wildfires in Maui, it seems bad things often happen when people rely too much on the government to perform as efficiently as the private sector.
LABOR MARKETS
Despite all the challenges facing the economy, employers are still having difficulty finding quality workers to fill entry-level and semi-skilled jobs. Moving forward, the United States is simply going to have to rely even more heavily on its massive migrant workforce to take these “legitimate” jobs.
UKRAINE
As the war in Ukraine drags on, it has been largely relegated to the back pages in the U.S. media. Depending on which poll you consider, it appears U.S. public opinion is almost evenly split as to whether to continue to arm the Ukrainians.
CONSUMER PRICE INDEX
At the start of 2023, we replaced gaudy monthly CPI numbers from 2022 with lower ones in the equation. However, the monthly CPI data for the last 6 months of the past year was actually pretty normal. This means we are replacing like data with like data, at best.
FEDERAL FUNDS RATES
As we started the 3rd quarter, the overnight rate was 5.25%, and the Street thought it might go to 5.50%. Three months later, the rate is 5.50%, and investors now think 5.75% is a real possibility. The lesson learned? The more things change, the more they stay the same.
TREASURY BILLS
When in doubt, investors still like the safety of U.S. Treasury bills. They like them even more when the 3-month and 6-month T-bills have a yield to maturity of 5.50%.
CASH
For over a decade, it was bad form to keep cash in your investment portfolio. With yields at or barely above 0.0%, you lost purchasing power in keeping any “dry powder.” However, when yields are north of 5.0%, cash magically becomes a legitimate asset class again. Weird.
GAS PRICES
No matter how much we hear and read about EV, most people and businesses around the country still rely on fossil fuels to move themselves and their products around. At the start of the year, global supply outstripped global demand. However, by the end of the quarter, a slight uptick in Chinese usage coupled with production cuts from OPEC and Russia, and Americans were feeling pain again at the pump.
CONSUMER STRENGTH
According to most data series, the U.S. consumer remained surprisingly resilient during the 3rd quarter. This despite the uptick in inf lation. It remains to be seen how much longer this will continue. Will a tailwind from the strong labor markets be enough to help the United States avoid a major recession? That is a great question.
The question now is: what can the economy do for an encore in 2024?
This content is part of our quarterly outlook and overview. For more of our view on this quarter’s economic overview, inflation, bonds, equities and allocation read our entire 3rd Quarter 2023 Macro & Market Perspectives.
The opinions expressed within this report are those of the Investment Committee as of the date published. They are subject to change without notice, and do not necessarily reflect the views of Oakworth Capital Bank, its directors, shareholders or employees.