Upbeat out of the gate following a better-than-expected first half of the year, Q3 began with markets continuing their steady climb higher. July saw many industry analysts, who previously saw a recession just around the corner, adjusting their position. During the quarter, the economy continued to grow, corporate profits rose, and unemployment stayed below 4%. Why then did the YTD market run fail to make a repeat performance? In a word, inflation.
While inflation continues to slow and has declined significantly since its peak at 9% in June 2022, it’s still uncomfortably high. Prices remain at painful levels for many consumers, exacerbated by depleting/depleted pandemic-related savings. Rising energy costs and housing market challenges support the notion that the Fed is unlikely to pivot and interest rates will remain “higher for longer” (the new catch phrase).
The U.S. economy remains resilient – even in the face of higher interest rates. It’s interesting to note that, despite the passing of twelve months, things don’t look a whole lot different than when we drafted our Third Quarter 2022 Executive Summary. “And so, we find ourselves much as we exited Q2, with the Fed working towards a ‘soft landing,’ attempting to curb inflation without crippling economic growth – no small task with inflation at a 40-year high. … Corporate America has shown its resilience in a difficult and complicated environment. Earnings declines predicted going into 2022 have not materialized.”
With the economy facing a myriad of challenges – a potential government shutdown, worker strikes, escalating energy costs, geopolitical concerns which now include a conflict in the Middle East, it’s natural to be apprehensive. We remain cautiously optimistic, knowing that time is the ally of long-term investors.
Again, our philosophy has always been to create a solid plan, utilizing quality investments, and commit to it. There will always be uncertainty. There will always be unexpected twists, turns and varying levels of volatility. We are confident that, with a well-devised plan that focuses on your long-term goals and objectives, the best strategy remains staying the course.
“Stay the course, even when faced with setbacks. The path to success is rarely a straight line.” -- Unknown
Recent Economic Data:
Gross Domestic Product (GDP). The GDPNow model estimate for real GDP growth in Q3 2023 is 4.9% (seasonally adjusted annual rate; estimate released October 5, 2023) – stronger than expected and a significant increase from 2.1% in Q2 2023.
Unemployment. Total non-farm payroll employment increased by 336,000 in September, and the unemployment rate at 3.8% is slightly elevated from 3.6% in June. Over the past 12 months, hourly earnings have increased 4.2%.
Consumer Confidence. Fueled by inflation concerns, the Conference Board Consumer Confidence Index, an indication of consumer attitudes and buying intentions, fell in September for the second consecutive month. The index stands at 103.0, down from 109.7 in June, (1985=100).
Consumer Price Index (CPI). The CPI for All Urban Consumers (CPI-U), a measure of inflation which shows “cost of living” fluctuations, increased 0.6% in August, up 3.7% over the last 12 months on a seasonally adjusted basis. This is a marked decline from August 2022’s increase of 8.3% before seasonal adjustments.
Earnings. For Q3 2023, the estimated (year-over-year) earnings decline for the S&P 500 is -0.3%; however, we anticipate that actual Q3 earnings will show a slight increase as a result of a stronger than expected economy and consumer demand. 85% of S&P 500 companies reporting actual results have reported a positive EPS surprise.
Housing. Privately-owned housing starts in August were at a seasonally adjusted annual rate of 1,283,000, below the July estimate and well below the August 2022 rate of 1,505,000. Low inventory with escalating home prices and mortgage rates has put the purchase of a home out of reach for many perspective U.S. buyers and is taking a toll on builder confidence as buyers elect to defer a home purchase.
September 30, 2023
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Executive Summary Sources:
The views expressed represent the opinion of Asset Management Financial Solutions, Inc. (“AMFS”) and are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and AMFS’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties.