Following a strong first half of 2023 for financial markets, both stock and bond returns were weaker by around 3% in the third quarter as macro-economic factors and geopolitical developments tested the resolve of investors. In the fixed income market, bond prices continued to be under pressure from rising interest rates, with the Federal Reserve now having authored eleven rate increases over the last nineteen months. If there is a silver lining, investors would point to the attractive 5% income yield now offered by money market mutual funds. For equity holders, September has typically been a difficult time for stocks, and the month again lived up to its reputation. With S&P 500 profits in decline over the prior three quarters, corporate earnings reports being released over the next few weeks could play an important role in stemming the market decline.
Year-to-date, the U.S. stock market advance continues to be driven by a few large technology stocks (i.e., Microsoft, Apple, Alphabet, etc.), with just seven stocks having produced 84% of the market advance yearto- date. Market gains concentrated in such a small number of stocks are considered unhealthy for the broader market and bears watching closely. Even so, equity investing has continued to offer investors protection from the ravages of inflation, a valuable trait not to be underestimated.
Overseas, China’s economy continues to struggle with deflation, plunging trade volumes, and high youth unemployment. The Chinese real estate market, which makes up about a third of their economy, has been under significant pressure, further dampening the confidence of the local consumer. The struggles of the Chinese economy, coupled with strength in the U.S., is quite a turn of events with the latter enjoying greater than 2% GDP growth year-to-date. As economists adjust their forecasts for the major economies of Europe, Asia, and North America, the key themes emerging are growing government debt and rising interest payments. In each region, run-away government borrowing poses growing challenges to the global economy, with the United States’ $32 trillion of debt and $1 trillion of annual interest expenses becoming dual risks too big to ignore.
Looking ahead, the U.S. consumer will have much to say about the direction of the economy, as household spending makes up two-thirds of overall economic activity. However, there are reasons for caution as it relates to consumer spending, with the U.S. recently surpassing $1 trillion dollars in credit card balances, while individuals with student debt brace for the resumption of loan repayments in October. Adding more uncertainty to the market outlook are threats by the Jay Powell led Federal Reserve to keep interest rates higher for longer in their quest to bring inflation down to its 2% target. This tighter monetary policy administered by the Fed could further constrain the mortgage sensitive real estate market, as well as crimp the borrowing and investment plans of corporations.
