Third Quarter 2023 Market and Economic Review

Where the U.S. Economy Sits Through Q3

The third quarter of 2023 continued the economy’s skulking march through 2023. With periods of growth followed by market retreats, constant volatility appears firmly entrenched for the time being.

The primary drivers for Q3 are three-fold: the Fed’s continued fight to bring down persistent inflation, a series of union strikes capped by the United Auto Workers, and political squabbling in Congress that has stalled growth on a couple of fronts.

The Federal Reserve is pulling its interest rate lever firmly to drive the inflation rate down to its target of two percent. Simultaneously, economists are debating whether increases are still warranted, whether pauses are in order, and when decreases should be put on the table. Likewise, the markets are bouncing up and down based partly upon that speculation along with key data points – such as job growth and earnings reports – as they become available. Often, the data has contrasted with the Fed’s efforts.

In July, the markets were up based in part on the generally positive earnings reports that came through better than anticipated. Economic growth figures were also better than projected. Those data points, along with continued steady declines in inflation, led many to feel good about the chances of achieving a “soft landing” – lowering inflation to two percent without driving the economy into recession. Some even speculated that the Fed may be done raising its interest rates and may begin lowering rates as early as the first quarter of 2024.

However, the narrative changed in August, and economists began speculating that the Fed may not be done raising rates and may not be ready to lower rates as early as previously believed. And though the Fed did press pause on rate increases in its September meeting, they also plainly stated that they were poised and ready to continue rate hikes in the coming months if they felt conditions warranted it. The markets responded with steep drops, essentially eliminating the gains experienced at the start of the quarter. Both the S&P 500 and NASDAQ finished negative for the quarter.

The second major storyline impacting our economy over the past quarter has been employment strikes. Notably, the writer’s and actor’s strikes, UPS, and now the UAW have all made headlines. Essentially, the past couple of years of steep inflation have made life challenging for workers, and they are pushing back for better wages and conditions. The UAW strike will have the largest impact on the overall economy as it has the most significant supply chain (and the UPS strike was settled in a matter of days).

The UAW is just a single industry, so its overall impact is minimal. However, the longer it drags on, the bigger the lagging effect it will have on the supply chain. By striking against all three major U.S. auto manufacturers, the various suppliers have few options to turn to for sales, and some may be forced out of business. That will create a lagging effect on the supply chain once the automakers do return to normal operation. Combine that with the raises the workers are requesting, and the price of cars will have to increase, adding to inflationary pressures.

Lastly, there’s Congress, which is very narrowly divided between parties and has challenges setting policy on a pair of issues that will have a noticeable impact on the U.S. economy. Most recently, the House narrowly avoided a government shutdown by passing a stop-gap bill to move forward with a budget plan. However, the bill only provides about a one-month reprieve, and with the recent removal of the House Speaker, agreeing on a new budget could be challenging in November.

Receiving less headline space than other economic influencers mentioned above but producing more economic impact is the block on President Biden’s original student loan debt relief program. While a new plan is in the works, the burden of student loan payments could fall back onto the original borrowers – though there is certainly debate about how and when those payments would be required.

Something to keep in mind is that much of the U.S. economy is driven by the consumer. And the consumer has been stronger than expected over the past couple of years despite inflation and rising interest rates due in part to their ability to draw on reserves saved during the Covid pandemic. As those reserves dry up – which is expected to happen in the next few months – our consumer-driven economy could have a more difficult time handling challenges such as strikes, student loan payments, and a potential government shutdown.

The current volatility combined with these potential added pressures is raising the question of whether we’re setting the table for a more severe recession in 2024 by averting it in 2023. It all sounds a bit gloomy, but it’s important to keep in mind several points. Most issues described above are industry-specific and have relatively negligible impact on the overall economy. Stocks are still above where they started for the year, and good investment opportunities are on the board. The key is being diligent in researching good opportunities, diversifying, and staying focused on long-term strategies and goals.

Also, be cautious of overreacting to news headlines designed to elicit a response by clicking and reading an article. A client recently showed us a headline using the term “nosediving” to describe what was effectively a one-percent market change.

A Peek Around the Globe

We’ve spent a lot of words describing the domestic scene because of nuances that are generating sizeable volatility in U.S. markets. But there is certainly news on the international front, too.

In China, the primary battle is with its own financial challenges. Many of the local governments across the country are drowning in debt, and it’s not yet understood exactly how the national government will resolve those issues. At the same time, the real estate market is very stagnant, leaving major property developers, like Country Garden, in a very tight spot and needing debt reprieves from their creditors.

However, China commonly withholds much of the financial news and happenings within its borders. Just two years ago, Evergrande, another major real estate player in China, was in a similar spot as Country Garden. That storyline effectively went into hibernation, and while Evergrande just recently reappeared on the trading block after a 17-month trading halt was lifted, the company could be approaching liquidation; however, with less of an international spotlight this time around.

In Europe, the invasion of Ukraine by Russia continues to drag on. Even though the U.S. and other Western European countries have levied steep sanctions upon Russia, President Putin has been able to maintain the Russian offensive with help from China and N. Korea. The result is a conflict that continues to drag on and produce economic strains for much of the world, but especially Europe.