I hope you are enjoying these last few months of the year! As we head into the final stretch of 2023, here is a review of the third quarter’s key market and economic developments.
S&P 500: A Breather After Three Straight Positive Quarters
Overall, stock market bulls were on the retreat during the third quarter of 2023 as several major stock indexes traded lower in response to rising interest rates and a strong dollar.
In fact, after three consecutive positive quarters for the S&P 500, the large-cap index found some sellers in the third quarter. Utilities and real estate contributed to the selling, while the energy sector surged on the back of higher oil prices.
Economy: Soft or Hard Landing?
Rising interest rates and stubborn inflation remain front and center. The Federal Reserve has clearly communicated its “higher for longer” expectations on interest rates, and the message is starting to sink into the markets.
A recession induced by a rate-hiking Fed and pesky inflation is still a distinct possibility. Interest rates rose steadily across various durations and products throughout the quarter, and a tighter lending environment is a factor in the financial markets.
Inflation Mixed for Quarter, Ticks Higher
Inflation metrics were mixed in the third quarter, with consumer inflation reversing its previous downward trend and picking up in August and September data releases.
The last Consumer Price Index (CPI) release of the quarter showed a 3.7% rise year-over-year in August versus 3.6% expected. This was much higher than the 3.2% rise year-over-year in July. The recent uptick in headline consumer inflation helps to support the higher-for-longer interest rate narrative that the Fed is broadcasting.
Core CPI (which removes volatile food and energy) ran a little hot in August but remains in its downtrend for 2023, providing a mixed theme on inflation.
With that said, we don’t need to be economists to realize that food and energy are the things that are hurting our pockets.
Fed Summary & Outlook
The third quarter featured two Federal Reserve meetings, with the Fed raising rates by 25 basis points in July and leaving rates unchanged at the September meeting. The result is a current target overnight lending rate of 5.25 – 5.50%, a 22-year high.
While the Fed left rates unchanged at the most recent meeting, it did let us know that policy could remain “restrictive”. The Fed also indicated it would need to see more evidence that inflation is under control for these restrictive levels to be changed.
The consensus at the start of the fourth quarter is that there will be one more hike in 2023. The Fed is heavily data-dependent, so probabilities may shift over this quarter in relation to key data releases.
It was an eventful quarter in the financial markets, and it is still a highly Fed-centric market, with any clues presented by labor and inflation data being front-and-center.
Investors may have to get used to higher rates, potentially even higher than present levels based on historical patterns. The good news is that the fourth quarter is historically the best quarter for stocks. Time will tell if that pattern holds true this year.
With that said, if there are any third-quarter market developments on your mind, or if there is anything else I can help with, please feel free to reach out to our team. We are always here as a resource for you.
Andrew Fairman, CFA, CFP®
Chief Investment Officer