The Economy is Changing. What You Need to Consider for Q4

For most of 2023, investors have been switching gears in this economy against an ever-evolving macroeconomic backdrop. From the war in Ukraine to the Middle East, social anxiety is up. Even the economic growth of the top ten companies in the world isn’t enough to abet fear. Beyond that, inflation has proven to have staying power.

Currently, the economic growth in the US is supported by resilient consumers. Many of them are dipping deeper into their savings and investments while also spending on credit.

However, there have been signs of a rally in energy prices while consumer pessimism climbs. People are tired in 2023 and are in need of a global reset in leadership and focus. Brick-and-mortar retail sales are slowing down, even with the Biden-Harris administration taking a victory lap. At this rate, we are living from Federal Reserve (Fed) decisions to interest rate hikes. The market is still in a cocaine bear spiral with a year-end ending of 4,500 for 2024.

“Sit tight and Assess” or “Wait and Assess“, either way, American households are in a holding pattern until 2025.

Here are a few things you can do to improve your household’s financial health. Lock in your lifestyle expenditures. Pay off consumer debts. Stash enough away for emergencies. Build a 10 percent investment cash reserve. And finally learn to buy in during corrections of 10 percent or more.

Table of Contents

Disinflation slows as core CPI moves in mixed directions

Seeking Alpha warned that the S&P500 was at “Risk of Collapse” based on numerous bearish technical signals. Perhaps “collapse” isn’t the best way to describe what happened next, but the action sure wasn’t bullish.
The headline consumer price index (CPI) rose 0.6% for the month of August. Up 3.7% from a year ago, an acceleration from July’s 3.2% pace. However, the move higher was driven by higher energy prices with gasoline prices rising 10.6%.
On the other hand, core CPI, which excludes food and energy, moved lower, from 4.7% to 4.3%.
The acceleration in both consumer and producer prices over the past two months might not have much lasting power.
As wage gains and housing inflation ease, core inflation will continue to moderate. The economy and the market will have a tougher time through 2024.

Retail Sales are showing some fatigue

Retail sales rose 0.6% in August compared with July.
The consumer, the main cylinder of the U.S. economic engine, is still firing.
However, consumption growth is losing some momentum. Excess pandemic savings accumulated over the past three years have been largely drawn down. According to a San Francisco Fed study, US households depleted their $2.1 trillion of “excess savings”.
Moderating wage gains and high borrowing costs; there is a little less dry powder for consumers to spend.

Source: Fisher Investments

How big of a threat are rising oil prices?

After averaging $75, WTI crude oil prices reached a 10-month high last week of about $90 a barrel. However, this is still below last year’s $123 peak. The main driver has been production cuts from Saudi Arabia (the top oil exporter) and Russia. Both countries announced earlier this month that they will maintain the current lowered production through the end of 2023.
Higher energy prices generally act as a tax on the consumer. As households spend more on gas, that leaves fewer dollars to spend on other things. This dynamic can help keep inflation in check, as it potentially leads to cooler demand for some services.
Unlike 2022’s spike in oil prices following the invasion of Ukraine, natural gas prices have not risen. This should continue to provide some relief for utility costs, especially in Europe through winter 2024.
Domestically, the U.S. consumer has been spending at an elevated pace. However, demand for holiday travel is down. 92% of adults have reduced their spending over the past six months, according to CNBC’s Morning Consult.

The labor market is gradually softening

One of the most important pieces of the economic puzzle is the labor market. Job security and income gains drive consumer confidence.
Employment conditions remain strong. The unemployment rate nears historic lows and demand for labor exceeds supply.
The unemployment rate held at 3.8% for September, according to the jobs report released on Oct. 6 by the Bureau of Labor Statistics (BLS).
Over the next 12 months, the gap between job openings and the number of unemployed will close more materially. Unemployment will likely rise by YE 2024, contributing to slower consumer spending. A softer labor market will take some heat off the Fed.

Fed wants to Downshift-and-Reverse but Can’t

People are spending too much. Mixed inflation reports do not change Fed policy. Fed officials have indicated that they want to slow down the pace of rate hikes. This is why they keep rates steady through YE 2023.
However, any potential bumps to the disinflation trend could keep open the possibility of a rate hike.
Bond markets are pricing about a 30% chance of one last hike in November 2023. Followed by one percentage point of rate cuts by the end of 2024.
We will likely see a cut late in 2024. It’s either the consumer breaks or the economy.

S&P 500 Sector Performance	YE 2022	Q3 2023	Year to Date (YTD) 2023
Energy	65.7%	12.2%	4.4%
Communication Services	-39.9%	3.1%	15.9%
Financials	-10.5%	-1.1%	31.0%
Health Care	-2.0%	-2.7%	0.5%
Materials	-12.3%	-4.8%	13.5%
Consumer Discretionary	-37.0%	-4.8%	0.8%
Industrials	21.1%	-5.2%	4.5%
Information Technology	-28.2%	-5.6%	34.7%
Consumer Staples	-0.6%	-6.0%	-4.8%
Real Estate	-26.1%	-8.9%	-5.5%
Utilities	1.6%	-9.2%	-14.4%

Notes: All major global equity market categories were negative for Q3 2023. Refer to Novel Investor

Slowdown can still support markets, but the road looks bumpier

Fed tightening) started to work. However, consumer spending is in hyperdrive. The economy can safely turn on inflation, only if people stop spending. There might be a slowdown in growth to below trend in the quarters ahead, but the soft landing has widened.
There is no way to avoid a recession. Our base-case scenario now calls for a rolling downturn as parts of the economy stabilize. This means that different sectors will be hit at different times. I.E. expect a slowdown in manufacturing, a decline in housing prices, and so on.
The underperformance of small-cap stocks is a cautionary sign that risks remain.
Investors might be well-served by setting realistic expectations for returns and volatility. We just spotted the 10% correction, which typically occurs on average once per year.

Market Stats Recaps

INDEX	Closing YE 2023	September Change	Year to Date (YTD)
Dow Jones Industrial Average	34,619	0.1%	4.4%
S&P 500 Index	4,450	-0.2%	15.9%
NASDAQ	13,708	-0.4%	31.0%
10-yr Treasury Yield	4.33%	0.1%	0.5%
Oil ($/bbl)	$91.10	4.1%	13.5%
Bonds	$95.51	-0.3%	0.8%

^{Source: FactSet, 9/15/2023. Bonds are represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results. *4-day performance ending on Thursday}.

A Quarter and the Year Ahead

Important economic data being released this week includes the FOMC meeting and preliminary S&P Global PMI data for November. The Fed predicts GDP growth will slow to just 1.5% in 2024, a modest but positive pace.

The nation’s top economists say the U.S. economy’s chances of avoiding a recession are improving — but risks of one remain.

Recession odds between now and September 2024 have dropped to 46 percent, according to Bankrate’s latest quarterly survey of economists.

This resilient global economy will still be limping along.

Swiss Bank UBS said it now expects the S&P 500 to hit 4,700 points only by December 2024. An update of +4 percent that the bank forecasted earlier, due to expectations of higher-for-longer U.S. interest rates.

Well sit tight and assess while dollar cost averaging with your netmax financial plan. While you do so please don’t over-leverage your own future. Decreasing Savings, Increasing Spending during High Inflation and Spending on Credit are all part of a three-item recipe for future financial disaster. It’s like buying something that’s valued at $100 for $500 later. This will hurt you in the end. So don’t!