Markets spent the first half of October focused on the same old story: Where are we with inflation and will the actions of the Federal Reserve (the Fed) push the economy into a recession? Any news suggesting “sticky” inflation, a possible rise in interest rates or the likelihood of a recession drove daily losses. Conversely, news that suggests moderating inflation, Fed restraint or a mild recession (“soft landing”) lead to market gains.
Data from the first half of October was mixed, which resulted in daily volatility, but ultimately modest gains over the period. A closer look at that data helps explain the volatility and also provides some optimism for the future.
- Inflation: The most recent report released on Thursday showed a somewhat surprising increase. The Consumer Price Index (CPI) for September came in at 0.4% month-over-month (0.3% was expected.)1 Although slight, this increase above expectations drove market losses for the remainder of the week. In positive news, wholesale gasoline prices have fallen quite sharply in recent weeks due to falling crude oil prices and narrower refiner margins. If the trend continues, energy prices should subtract from inflation in the months ahead.2
- The Fed: Earlier this week the Fed released the minutes from their September meeting. Most members view one more interest rate hike this year as appropriate, although a minority of members did oppose any further increases.3 We believe the market has already priced in this rate increase and whether it happens at the November or December Fed Meeting, it should be a non-event.
- Recession: The U.S. Economy, as measured by Gross Domestic Product (GDP) grew at a very strong rate of 4.0% in the 3rd quarter. Consumer spending, which makes up 2/3 of GDP continues to be strong despite elevated interest rates. Predictions for 4th quarter growth are closer to 2% as consumer spending is expected to slow due to the resumption of student loan payments and continued higher mortgage and auto loan rates.4 Slowing economic growth, while avoiding a contraction is the “soft landing” the Fed is shooting for. Currently, that looks like it may be a real possibility.
Reviewing returns for the first half of October, the markets closed slightly higher. As of market close on October 13th, the Dow rose 163 points (0.49%), the S&P 500 grew by 40 points (0.93%) and the NASDAQ Composite Index (NASDAQ) increased 183 points (1.38%).
1 www.seekingalpha.com “Nasdaq, S&P, Dow close lower after hot CPI data; eyes on big bank earnings” October 12, 2023
2,4 “Investing in a World of Increasing Complexity” Dr. David Kelly, Chief Global Strategist at J.P. Morgan Asset Management, October 10, 2023
3 www.investors.com “Dow Jones Rises After Fed Minutes; Meta Breaks Out” October 11, 2023
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