Where is the Economy Headed? Making Sense of Today's Economic Realities.
HWM Market Recap - October 2023
Executive Market Summary
It has been a tough month and quarter for the stock market. The S&P 500 finished its second month in a row in the red and the first negative quarter this year. Clearly, the market is skittish. When investors look for more risk, they usually favor things like small companies, high-beta stocks (companies that show greater price movement relative to the broader market), and initial public offerings – all of which have underperformed in the last two months. Between a potential government shutdown, union strikes, housing pressures, student loan repayments picking up, and more, investors show a lack of risk appetite in the stock market.
This is evidenced in the Conference Board's Consumer Confidence Index, which tracks consumer sentiment about the present economy and expectations for the future of the economy. The index shows a contradiction between the current and future expectations, with people believing that the economy is strong now but will weaken in the future. Rarely has the index shown such an extreme disagreement between present feelings and future expectations, and history tells us the gap will have to close one way or another. As we approach the fourth quarter of the year, the push-pull in consumer sentiment has investors asking if we will avoid a recession in 2023, and if so, does that increase the likelihood of one in 2024?
Inflation also continues to be on everyone's mind. However, the good news is that it is definitely slowing, and the odds of the Federal Reserve raising rates are diminishing with every monthly inflation report. We expected that inflation would ease over the past year, which it has – the Consumer Price Index (CPI) has fallen to 3.7% annually from its June high of 9.1%. We also expected that prices would be sticky and keep inflation uncomfortably above the Federal Reserve's goal – as evidenced by the CPI ticking up the last two consecutive months due to a tight labor market and inflated home prices. Evidently, the Federal Reserve's intentions of reducing inflation from about 4% to their 2% goal is proving challenging. Therefore, we do not entirely rule out the possibility of further rate hikes this year, as it seems that rates will need to be higher for longer to restore price stability.
As usual, the consumer has been the driving force behind the U.S. economy, along with historically elevated levels of government spending. A significant part of the Federal Reserve's rationale for raising interest rates as aggressively as they have was to get the consumer to slow down spending. Despite this, consumer expenditures have exceeded expectations. However, evidence points to rising consumer stress, resulting in weaker demand for discretionary (non-essential) expenses. Pandemic-related savings have dried up, pushing individuals to tighten their belts. Delinquencies for consumer loans are at a ten-year high, retailers are reporting sales slumps, and people are saving less. Housing continues to be a pain point for individuals with tight inventory and mortgage purchase applications at a 28-year low as the average interest rate on a 30-year fixed mortgage is the highest it has been in over twenty years.
The labor market also continues to tighten. Job openings are on their way to normalizing back to pre-pandemic levels. Also, the rate at which individuals quit their jobs has dropped precipitously to pre-pandemic levels, demonstrating that jobs are less plentiful and individuals are less confident in their ability to find a new job if they leave. Job cuts spiked at the end of 2022, initially due to layoffs in the technology sector, but has now expanded to more industries. One number in particular economists will keep a close eye on is the unemployment rate, which is at an 18-month high.
While we cannot know the future, we can at least observe the present and size up the odds of certain outcomes that the market is outlining. At this time, it is difficult to envision the soft or no landing outcome some economists predict with everything highlighted above. In being long-term investors, it's not about squeezing every last dime out of the market to ensure we are not leaving any money on the table but instead being mindful of what brought us to the table in the first place while managing risk. As we wrote about last month, we are getting paid handsomely to wait and let the economy sort through some of its issues. With cash equivalent securities yielding over 5%, we do not feel a need to rush back into the stock market, so we proceed ahead into the last quarter of 2023 as we have done so since the year began – cautiously.
Monthly Changes in Indices
Year-to-Date Changes in Indices
Monthly Performance By Sector
Year-to-Date Sector Performance
Political Events Influencing the Economy
Ford, General Motors, and Stellantis (Jeep, Dodge, Chrysler, etc.) each failed to negotiate new labor agreements with the United Auto Workers union before their contracts expired, resulting in tens of thousands of employees at the three biggest car manufacturers going on strike. Their strategy has been for union workers to walk out in waves at specific locations as negotiations persist. This is the first simultaneous strike at all three Detroit automakers in the union's history. The UAW has roughly 150,000 members who are employees at these three auto and get paid $18 to $32 an hour to produce about half of U.S. passenger cars. The union is demanding:
Proportional pay increases to executives' raises,
The removal of the 'tiered' pay system that makes earning top wages take eight years,
A 32-hour workweek with 40-hour pay to compensate for mandatory overtime burnout, and
The restoration of pensions and cost-of-living adjustments.
The Consumer Price Index (CPI) surprised to the upside at 3.7% on a year-over-year basis, its second consecutive increase. While rising gas prices partially contributed to the CPI's jump, other measures indicate that inflation is rebounding across various industries. The Median Consumer Price Index, which gauges the broadness of underlying pricing pressures and is not skewed by heavily weighted items or outliers, had declined over the past year but suddenly rebounded last month.
The Producer Price Index (PPI), a measure of wholesale inflation that tracks many essential input costs for businesses, has also increased over the past two months. This rebound comes primarily from surging goods prices and services inflation stabilizing at over 2%. Rising input costs of businesses will likely impact future earnings, given that corporations find it more difficult to pass on cost increases to their customers.
Consumer prices were up 4.3% year-over-year in September for the 20 countries that use the Euro, down from 5.2% annually in August. The European Central Bank elected to raise its interest rate target in September in direct contrast with the Federal Reserve and Bank of England, which both did not.
The U.S. Census Bureau reported that housing starts in August fell 11.3% from July and a 14.8% decrease from August 2022. This was predominantly driven by a sharp reduction of multifamily units like apartments and condos, but starts of single-family homes fell by 4.3%, too. Moreover, a National Association of Home Builders survey shows a steep decline in builders' confidence. According to the NAHB, 32% of homebuilders cut home prices in September, compared to 25% in August. That marks the largest share of builders reducing prices since December 2022. Over the course of the year, the S&P CoreLogic Case-Shiller National Home Price Index (which tracks single-family home prices in nine U.S. Census divisions) reversed a short-lived dip in home prices, returning to all-time highs.
According to the National Federation of Independent Business (NFIB), a historically high 30% of small businesses plan to raise prices over the next three months. Small business price plans have been a good leading indicator of inflation over the past few years.
After halting TV and film production for nearly five months, the Writers Guild of America (WGA) – the union representing Hollywood writers – agreed to a deal with studios and streaming platforms, thus ending the writers' strike and the second-longest strike in Hollywood history. SAG-AFTRA, the union representing actors, is still on strike, however.
The New York City Mayor and the state's governor declared a state of emergency as the Big Apple was hit with its heaviest rain in decades, flooding roads and subway stations and delaying air travel.
For the first time in more than 50 years (excluding a post-drought outlier in 2013), the U.S. is not the top global exporter of corn. In the agricultural year ending August 31st, Brazil shipped 32% of the world's corn exports, compared to the U.S.' 23%. The U.S. also lost the No. 1 spot for soybean and wheat exports in the last decade.
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Holzberg Wealth Management is a family-owned and operated financial planning and investment management firm based in Marin County, CA. As your financial advisors, we serve you as a fiduciary and are fee-only, so we never receive commissions of any kind. We help individuals and families like you in the greater San Francisco Bay Area and virtually nationwide with the financial decision-making process to organize, grow, and protect your assets.
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