Third Quarter 2023 Update

October 1, 2023

Key Points

• Stock prices were mostly lower in the quarter following the second quarter’s gains.
• The FOMC raised the federal funds rate target range once during the quarter – at its July meeting – to a range of 5.25%-5.50% from 5.00%-5.25%.
• The economy’s staying power has been somewhat surprising to economists, many of whom had expected a recession by now because of the rising interest rate regime instituted by the Federal Open Market Committee (FOMC), and still-elevated inflation.

3rd QUARTER 2023 MARKET COMMENTARY

Below, we’ve highlighted 2023 broad market returns for the current quarter and year-to-date time periods:

Source: Refinitiv

THE GLOBAL ECONOMY

The US economy continued to show resilient growth in the second quarter of 2023, posting its fourth consecutive quarter of growth. The economy’s staying power has been somewhat surprising to economists, many of whom had expected a recession by now because of the rising interest rate regime instituted by the Federal Open Market Committee (FOMC), and still-elevated inflation. Within this context, the Bureau of Economic Analysis released the third estimate of the second quarter 2023 real GDP, a seasonally adjusted annualized rise of 2.1%, a slight decline from the 2.2% increase in the prior quarter. The employment situation continued to demonstrate steady growth in the quarter. The August employment report showed that employers added 187,000 jobs in the month, and that the unemployment rate was slightly higher at 3.8%. The FOMC, in its continuing effort to tame inflation, raised its federal funds rate target range by 0.25% in the quarter, to 5.25% to 5.50%, from a range of 5.00% to 5.25%. The FOMC has since taken another pause on its rate hikes and will be assessing underlying economic conditions to determine if further action is warranted.

EQUITIES

Stock prices were mostly lower in the quarter following the second quarter’s gains. Except for stocks in a couple of sectors, losses were broad. The economy’s continued steady growth has been somewhat surprising to analysts, but the significant rise in yields has meant investors have alternatives to stocks. For the first several weeks of the quarter the S&P 500 marched higher, reaching its peak on July 31st before then trading lower throughout the remainder of the quarter. When the quarter ended, the S&P 500 Index had declined 3.3%.  International stocks also generated negative results during the quarter, with the MSCI EAFE Index of developed markets stocks lower by 4.1% and the MSCI Emerging Markets Index declining by 2.9%.

FIXED INCOME

The FOMC raised the federal funds rate target range once during the quarter – at its July meeting – to a range of 5.25%-5.50% from 5.00%-5.25%. The FOMC has paused its rate increase regime for the time being, as inflation has been trending modestly lower. Economists and analysts are split as to whether any further rate increase will be needed by the end of the year, and that the current levels are high enough to bring inflation down to its 2%   target level. Many believe the FOMC will not raise rates further in this cycle, and that there could be a rate cut sometime in 2024.  The shape of the Treasury yield curve remained in the same inverted shape as compared to that at the end of the second quarter, but it shifted higher and flattened out. Yields on the very short-term maturities of up to one year rose up to 20 basis points, while yields in the intermediate- and long-term segments of the curve rose between 40 and 85 basis points. By the end of the quarter, the yield on the benchmark 10-year US Treasury note was higher, ending at 4.57%, compared to 3.84% on June 30.

SUMMARY

The economy has so far been resilient in the face of the FOMC’s series of interest rate increases to battle inflation. However, there are signs that the increases are influencing growth, and many economists expect the economy to weaken substantially in the coming quarters. Rising interest rates are not the only headwind being faced by the economy. The potential government shutdown, the fallout from the banking crisis, the recent surge in oil prices, and a slowing in consumer spending as student loan repayments begin again are all issues weighing on the economy. Despite these hurdles, many economists believe the economy will end up slowing but not falling into recession. However, the risks that could tilt the economy into recession include an extended government shutdown, oil prices remaining high for a long period, a monetary policy misstep, continued fallout in the banking sector, and geopolitical tensions.

Information provided is for informational purposes only and should not be construed as investment advice. The views expressed are current only as of the publication date, are based on information that St. Clair Advisors believes to be accurate, and subject to change without notice. All investment decisions must be evaluated as to whether they are consistent with your investment objectives, risk tolerance and financial situation. St. Clair disclaims any liability for any direct or incidental loss incurred by applying any of the information in this publication. Indexes are unmanaged and one cannot invest directly in an index. Past performance is no guarantee of future results.

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