As the Fourth Quarter got underway, there were strong signs that the U.S. economy remains resilient, despite stock market volatility and consumers beginning to express some wobbles in confidence.
But the crisis in the Middle East, political divisiveness in the U.S., and chaotic developments in the House of Representatives make it difficult to get a handle on what to expect between now and the end of the year. It’s especially worrying when the tension-filled headlines spill over to rock the financial markets. The Hamas-Israeli conflict marked the return of stock market jitters and—in addition to the obvious humanitarian issues—also raised questions on a number of fronts, among them the future outlook for oil prices and production.
Stocks initially fell as shock registered after the weekend attack on Israel, but they had bounced back by the end of the first trading day after the news became known. After a difficult year for both equities and bonds last year, most equity indexes are up so far in 2023. Yet, some market analysts are still predicting a correction by the end of this year.
Inflationary and other pressures
The economic climate had previously turned gloomy during the last few days of September as a government shutdown looked inevitable. A deal culled together at the last moment averted that possibility but didn’t solve the underlying problems as a new fiscal deadline awaits in mid-November.
The pessimistic tone lifted with some unexpectedly strong news on jobs and unemployment. The U.S. economy added a stunning 336,000 jobs in September—twice what forecasters had predicted. At the same time, job numbers from July and August were both revised upward. That would normally be greeted as good news.
But with the specter of additional interest hikes looming, the booming job market has fueled the sense that the economy hasn’t cooled enough and could necessitate further aggressive moves by the Federal Reserve in its campaign to bring inflation down.
High interest rates have already taken a big toll on the housing market with demand for mortgages all but stalled and consumers worrying about tighter credit and higher borrowing costs overall.
And there are other factors fueling inflationary fears. Wages have also edged up. Even before developments in the Middle East, the price of oil had jumped on concerns about production. Food costs and prices at the pump remain high. And, the inflation rate for July and August each edged up off of June’s low of 3% year-over-year.
So, once again, all eyes are on the Fed, which paused rate increases again in September but signaled that more economic data and evaluation will determine whether another hike before the end of the year is warranted. The Fed meets again in mid-December.
The road ahead
By the midpoint of the year, recession fears appeared to have eased but they flared up again more recently as consumer confidence turned pessimistic.
Households have been struggling with the combination of higher costs of living for over two years and higher interest rates for the past year and a half.
Some retail analysts have begun to worry that reserves of cash accumulated during the pandemic have been drawn down by higher prices and healthy bouts of spending and may be depleted.
The holiday shopping season will hopefully provide its usual timely boost for fourth-quarter profits. The National Retail Federation expects shoppers to start early—sales promotions have already begun—but the organization has yet to release its precise predictions. Market-tracker Deloitte forecasts holiday retail sales to increase between 3.5 and 4.6% totaling $1.54–$1.56 trillion from November to January.
Historically, the fourth quarter has also been the best quarter of the year for the stock market. The S&P 500 has averaged a 4.2% gain during Q4 going back to 1950.
Ongoing uncertainty will likely prevail as the latest developments take shape in the U.S. and around the world. But seasoned investors have learned from the past that decisions based on panic or reactions to the latest headlines can often result in regrets down the road.
Wall Street may face the usual year-end sell-offs as investors rebalance portfolios. And while equities are likely to remain volatile, they still represent a way to maximize returns as long as they’re part of a well-diversified investing mix.
It’s helpful to stay in contact with your advisor during these times and ask for a review to see how exposed you may be to risk and, of course, discuss your concerns. It’s also an opportune time to review your financial goals and strategies and readjust where necessary as we move toward the end of the year. Please let us know how we can help. www.leskofinancial.com