October 31, 2023

It’s a Halloween tradition around here to write about what scares us around this time each year.  The past few years have offered plenty of material to use in these annual commentaries and this year is no different:

The things that give us chills…..

With wars in Israel and Ukraine ongoing, Washington, D.C. dysfunction, the unrelenting rise in interest rates, still-high inflation, unaffordable housing, tight financial conditions, and a Fed that has not yet signaled that it’s done hiking rates, the list seems to be a bit longer and scarier than it usually is.

Despite the intense diplomatic efforts to contain the conflict between Hamas and Israel, fears that a wider conflict would add to the tragic loss of lives and disrupt the energy markets have become more widespread. Elsewhere, the Russia-Ukraine war continues while it is possible China might take advantage of the U.S. being preoccupied with the Middle East as a reason to pursue more aggression toward Taiwan. The bottom line, the current geopolitical landscape is as dangerous as it has been in decades, and the risk of a spike in oil prices has increased.

If Congress cannot reach a funding agreement, the government will be forced to shut down. By now, the country—and U.S. creditors—are used to the drama that envelopes markets during these budget impasses. The need to keep federal operations functioning is particularly crucial, as funding for defense spending is (unfortunately) essential at this time.

The road to getting the U.S. debt problem under control will be long and tough. Though more of a long-term scare, a functioning government will be critical in coming years as federal debt service costs increase.

Rising rates remain perhaps the biggest challenge facing both equity and bond markets currently. Surging bond yields have contributed to one of the worst two-year periods for bond market performance in history and have pressured stock valuations at the same time.

The Not So Spooky….

But there are plenty of positives at the same time, including easing inflation, the resilient economy bolstered by a healthy job market, growing earnings, and the strong possibility that the Fed is done.

The market climbs a wall of worry so there is always something to scare investors. Today investors may feel like that wall is unusually tall, given the stiffening headwinds facing the economy, including the effects of rising rates, and two wars overseas as the S&P 500 enters correction territory (down 10% from its recent high). We expect the strong job market, cooling inflation, the end of Fed rate hikes, stable interest rates, and growing corporate profits to help stocks overcome these worries and keep this young bull market going. We believe the macroeconomic environment and seasonal tailwinds will provide enough support for stocks to move modestly higher over the balance of the year, though the path may be bumpy.

As always, please do not hesitate to contact me if you have any questions or concerns.