Market Currents – 10/27/23
- Q3 Recap. The market’s rally faded in the third quarter. Rising global bond yields, continuing investor concerns over inflation, and worries about the economic outlook all impacted the primary indices. As the quarter neared its end, the S&P 500 index retreated to its end-of-June levels, but still maintained a respectable return year-to-date.
- Seasonality Trends. Historically, the fourth quarter has been the most favorable for stocks, positive nearly 80% of the time. This follows a correspondingly weak mid-year stretch from June through September, the market’s worst statistical period. Seasonality patterns won’t, by themselves, dictate short-term market direction, but they are interesting nonetheless. Theories abound for fourth-quarter seasonality, but it is the time frame when the market begins to discount year-ahead earnings projections, which are typically optimistic, and tend to cast stock prices in a favorable (and buyable) light.
- Global Yields Spiked. The recent surge in interest rates has roiled both the stock and bond markets. The yield on the 10-year Treasury hit a fresh multi-year high in the quarter, finishing at 4.57%. More recently, it breached 5% for the first time since 2007. This rise in rates has been fueled by a robust US economy, but also by overseas selling of existing Treasury holdings, and by heavy debt issuance by the Treasury to fund a yawning government deficit. Expect to hear more, much more, about the debt and deficit situation in coming months. Other sovereign rates have also risen of late.
- National Debt. At the end of the 2023 fiscal year on September 30th, the national debt was a record $33 trillion and inexorably rising. There are multiple drivers of the debt, but they reduce to lower receipts and significantly higher spending. Low interest rates since the 2008-09 financial crisis helped to mask the debt problem, as interest outlays remained manageable despite the growing base of debt. With the recent rise in interest rates, debt servicing costs are rising sharply, consuming 15% of the total federal expenditure at present.
- US Economy Resilient. The economy has continued to defy predictions of recession, despite headwinds that include continuing (if decelerating) inflation and tight monetary conditions, Preliminary estimates have the economy growing at 4.9% for the third quarter, assisted by strong government spending and a rebuild of goods inventories. A strong jobs market continues to fuel consumer demand. The September employment report added 336,000 jobs, the 33rd consecutive month of job growth.
- Market Outlook. While 2023 has been favorable to investors, the near-term picture has been volatile and biased to the downside, driven by higher Treasury yields, which offer competition to stocks. Notably, the average stock in the S&P 500 is slightly down on the year; a small handful of the market’s largest stocks are pulling the market into positive territory. Corporate profits are tracking above estimates so far this reporting season, and forward guidance is, on balance, favorable. Markets correct in price, time, or both, and we believe the correction is close to running its course, having undergone a dual correction over the last several weeks (price) and the last two-plus years (time).