A Market Breather
Most asset classes took a breather in the third quarter from the strong first half of the year. The early part of summer brought a powerful rally in risk-oriented assets, but the prospects of interest rates remaining higher for longer has potentially caused the markets to pause and reassess the trajectory.
While it is easy to assume the worst, market corrections are a normal and healthy component of the dynamics persistent over time. In fact, the U.S. equity markets tend to see at least one correction of 10% or more once per year. Through the end of the third quarter, the decline had been 8%, so not particularly remarkable. Is it the start to a broader sell-off that is coming or a temporary pause before markets resume their ascent? Fortunately, valuations for U.S. equity markets remain generally at or below their 20 year average, so there is already a bit of uncertainty built into the prices today compared to beginning the decline from higher valuations.
The U.S. continues to face a myriad of difficulties from debt ceiling discussions (will that ever be resolved?), political turmoil (though when in history has it not been tumultuous?), work from home challenges, the entire technology industry rout, and kicking the recession can down the road. With the Fed’s restrictive monetary policy, the spillover effect to the consumer is leading some to question if “the once-fearless US consumer may be starting to buckle” (Source: Bloomberg). And, in the camp of good news-is-bad, jobs unexpectedly grew more quickly in September at a rate that was almost double what was expected. So, while jobs growth would be good in the long-term, in the short-term that has raised renewed concern that interest rates could see further (unexpected) increases. It is the unexpected information that causes markets to adjust – sometimes rapidly. The consumer does seem to be strained more than in recent years, particularly as the stimulus and excess savings since the pandemic are being drawn down.
Invariably, it is easy to miss the forest for the trees when looking at larger events that often cloud the actions that consumers make at an individual level. However, it is the ability for consumers to adapt in real time that can lead to the successes that lay the foundation for the start to the next positive cycle.
Many have postponed selling/buying a new home as a result of both higher interest rates and housing prices, people make adjustments to the trip(s) they take when gasoline prices start to soar (like they have recently), and consumer behaviors shift to lower cost alternatives where they can.
What behaviors have you adopted lately? Have you found yourself searching for ways to trim your budget? What might become a more permanent way of life versus a temporary change?
Q3 2023 Economic Update
Searching for normalcy and a troubled consumer
It is true that consumers are facing difficult times by a number of measures. Inflation has been running high for a while now which has implications for interest rates leading to higher prices for every-day purchases, and food costs continue to climb. But, many supply chain issues of the last several years have moderated. The strike of the United Auto Workers (UAW) has made major headlines, and it could kick off a spillover effect months/years from now. Fortunately, as the U.S. economy has grown over time, so too has the composition of the economy, so such events like the technology industry recession and the happenings of auto-workers can have material effects across the broader economy, but it does not necessarily derail the functioning of the entire economy.
And, while the recent job reports have been positive, it can make near-term decision making a little more challenging in the sense that interest rates may see another notch higher before 2023 officially comes to a close. So, much of the talk in recent quarters about expectations that debt might be refinanced in the next several years, or large purchases could be postponed until if/when interest rates drop, that reality may be further out than many had anticipated. When looking at personal budgets alongside long-term goals, we continue to be reminded that decisions should be made on what the cost is now, not what some theoretical cost might be a year or two from now under very specific assumptions, as any of those assumptions are likely to be challenged. The last twelve months have been a harsh reminder to many that the expectations of what anyone thinks might happen with interest rates could prove quite different. Think of the last cycle and how many experts anticipated rates would rise as a result of the Quantitative Easing from the Global Financial Crisis only to see the cycle for lower rates continue their downward trend for nearly 15 years!
Many companies continued to struggle with the dynamics of work from home, but it seems unlikely that this dynamic or discussion is going away any time soon. While some roles lend themselves best to an in-person environment, many companies are adopting some kind of hybrid structure for partial in-person day(s) or commitments. One theme arising out of this discussion is a search for more of a work-life-balance. In today’s world, our devices keep us connected 24/7, so it is unsurprising that so many are seeking the pursuit of balance between personal and professional lives that had become so blurred. This theme overlaps most areas of our lives, and the Global Pandemic likely accelerated this shift that was already previously underway.
There are many nuances to these long-term trends that could impact larger cities, offices, and commercial real estate. In fact, “office attendance in big cities is still barely half of what it was in 2019, and moves by companies to get tough are proving ineffective. Officials say a number of forces could push attendance rates further back down” (Source: WSJ). We remain cautious on both the structural difficulties facing cities and the repurposing needed for existing buildings and locations. All of this can very challenging in short-time frames (months/a few years), but the U.S. economy is very adaptable over a five+ year time-frame as we think of the infinite ingenuity and repurposing that can (and does) happen.
The Fed and the Consumer
We would be remiss to not focus on interest rates and inflation. It is a topic that is on everyone’s minds lately. Fortunately, we have narrowly missed a broad-based recession, but there may be difficult times for many. An area of the economy that had carried markets and employment for years (technology) suffered significant layoffs in the early stages of the interest rate rises, but many technology companies found solid footing throughout the summer from a hiring perspective with a frenzy of activity around Al. One of the key tenets of investing for the long-term is to remain diversified because it is impossible to know what tomorrow may bring. Just as swiftly as the markets erased trillions of dollars of wealth last year from tech, it recreated significant wealth in tech this year.
From a 30,000 foot view, it seems as if things are muddling through, but at the consumer’s micro level, it is not necessarily all roses. So, whether you or a loved one were impacted by the rout in technology, what is important to focus on is what can be done to adjust and adapt going forward. Periodic set backs should be accounted for in any financial plan, but it is how we react during times of stress (or distress) that can help add strength to the long-term plan. What adjustments can be made in the short-term to set yourself up for a more successful long-term future? Are there any adjustments to your current lifestyle that can eek out more efficiency and less spend (think of all those commercials centered around helping people cut leaky costs from their budget for subscriptions they did not even realize they were paying!). But, it’s not always about the expense side of things. Is there a new skill, certification, mentorship/mentee relationship that you could pursue that could help you get closer to your long-term goals that establishes new earning potential or expands networking opportunities?
The Fed expects to potentially raise interest rates another 0.25% later this year. How this might happen is a subject of debate since many are split between seeing this raise at the November vs. December meetings or if we might in fact already be done for the year if the data continues to indicate a continued pause may be warranted (Source: lnvestopedia).
What does continue to impact the markets and consumer behavior is the yield curve. Interest rates continue to be inverted wherein short-term rates are higher than longer-term rates. However, while an assumption can be made on when rates may peak, it is important to evaluate what this means for your personal finances in the context of your total picture. We encourage people to look at the long-term view, and while short-term savings rates have continued to hover above intermediate- and long-term rates, an investor should consider their specific timeline(s) and whether locking in today’s rates for longer (albeit at smaller than the short-term prevailing rates) is appropriate. For dedicated short-term goals that often include near-term major purchases, cash reserves used for paying taxes, etc. then short-term rates can be quite attractive. But, for anything longer than a 12-18+ month timeframe, we encourage you to get with your Client Advisor to review whether you could be aligning your longer-term goals with the resources you have available and what amount of “locking in” today’s rates may be appropriate.