October 6, 2023 – After a challenging two months, investors remain skeptical at the start of October.

Equities have been under intense selling pressure for the past two months, enough to push the S&P 500 index down -3.6% for the 3rd quarter of 2023 (still up +11% YTD.)

Weakness since the July 31st highs were primarily tied to Wall Street coming to grips with the Federal Reserve’s messaging of higher interest rates for an extended period. While keeping rates unchanged at their September FOMC meeting, Fed Chairman Powell said policymakers forecast one more rate hike in 2023 with no rate cuts expected until later in 2024.

Additionally, the ongoing United Auto Workers (UAW) strike that could produce upwards of 760,000 layoffs fueled additional volatility, as did the looming government shutdown that was averted in the final hour as Congress passed a bill in the final hours to push Washington’s spending deadline 45 days down the road.

Each one of the headwinds above represents the potential inflection point that could finally tip the US into a recession that so many have been looking for since the start of the year. But news flash, the US economy has remained resilient, defying many expectations all year long. The U.S. consumer and economy continues to be healthy, and this is enabling corporate profits to rise as we battle inflation.

Throughout 2023, it seems like equities (and S&P 500) have become a single-issue market, inflation. When we see progress, the market treks higher and when we see pauses, the market retracts.

Despite the adversity over the past two months, inflation IS coming down. Just look at the Fed’s preferred measure of inflation, the core PCE index (excludes volatile food and energy items) rose just +0.1% in August (+0.2% expected) and is up +3.9% year-over-year. This is the first annualized reading below 4% in two years! Even more favorable, the three-month annualized average of core PCE prices fell to 2.16%, just above the Fed’s 2% target.

So, while the inflation battle rages on and these temporary headwinds pose real danger, I suspect that these issues will eventually subside and focus on the consumer/the economy will become the focal point once again. As long as both remain resilient, so should the market.

As always, we will continue to keep an eye on the markets and alert you of any major changes as they occur.