Economy

Navigating Uncertainty: October Market Review and Outlook

October Market Review

In this October market review and outlook, we provide a summary of recent events in the economy and financial markets and offer insights into what this may mean for investors moving forward.

For the last year, forecasters have been predicting an economic downturn in the United States as the Federal Reserve (Fed) strives to control inflation by raising interest rates. Historically, the Fed has had difficulty achieving an economic “soft landing”—that is, taming inflation without causing a damaging recession—when raising rates.

However, more than a year into the Fed’s rate hike cycle, the U.S. economy remains resilient. In fact, the first estimate of third-quarter GDP growth came in at an annual rate of 4.9%, its fastest pace since 2021.

Meanwhile, financial markets have taken a hit in recent months. Both the S&P 500 and Nasdaq dropped more than 10% from their July highs in October, placing both indexes in correction territory. The bond market has also struggled recently as interest rates climb higher.

As we near year-end, many investors are concerned about what a potential recession and ongoing market volatility may mean for their money. Here’s a recap of what’s happened lately and what that may mean for investors heading into 2024.

The Economy Remains Resilient

Since March 2022, the Fed has hiked interest rates 11 times, raising the federal funds rate from near-zero to a target range of 5.25% to 5.5%. However, the Fed has held rates steady since July 2023 in light of moderating inflation and a remarkably resilient labor market.

According to the latest reading of the personal consumption expenditures price index, the Fed’s preferred measure of inflation, core inflation is now 3.7% year over year. While this is significantly lower than its peak reading in June 2022, it’s still a far cry from the Fed’s 2% annual target.

Meanwhile, the unemployment rate continues to hold steady at 3.8%, and third-quarter wages and benefits grew 4.3% year over year. Due in part to ongoing labor market strength, consumer spending increased by 4% in the third quarter, propelling GDP to an annual rate of 4.9%.

October Market Review: Financial Markets Continue to Struggle

Despite strong economic performance, the U.S. stock market continued its decline in October, marking three straight months of negative returns. A variety of factors are in part responsible for the recent pullback in performance, including:

  • Soaring Treasury yields. The yield on the 10-year Treasury note approached 5% in October, the highest level since 2007, curbing investors’ appetite for risk and creating headwinds for big tech and other high-growth companies.
  • Tax-loss harvesting. The recent pullback prior to October created more opportunities for tax-loss harvesting, which put additional pressure on the market in October as investors sold underperforming stocks to offset gains. On the bright side, research from Bank of America shows that although tax-advantaged selling typically pressures stocks at year-end, it often sets the stage for a strong rebound in January when traders repurchase.
  • Higher-than-expected GDP growth. Third-quarter GDP grew at a surprising 4.9% annualized rate, quashing hopes that the Fed will lower interest rates in the near term.
  • Ongoing geopolitical tensions. Russia’s war in Ukraine and the Hamas-Israel conflict continue to add to market uncertainty.

The bond market has also seen weakness as interest rates continue their ascent (in general, bond prices fall as interest rates rise, and vice versa). Both 10-year and 30-year Treasury yields increased more than 0.3% in October, causing longer-term bonds to underperform.

Looking Ahead: Underlying Economic Concerns

Although the U.S. economy continues to hum along, concerns of a potential downturn persist. Some of the factors that could contribute to an economic slowdown include:

  • Declining real disposable income and household savings. Personal income adjusted for taxes and inflation fell 1% in the third quarter after rising 3.5% in the second quarter. Furthermore, personal savings as a percentage of real disposable income fell from 5.2% in the second quarter to 3.8% in the third quarter. As consumers eat through their savings, they may not be able to spend at the same rate going forward.
  • Rising long-term interest rates. Long-term interest rates recently saw their highest levels since 2007. For example, 10-year Treasury yields briefly passed 5% in October, while 30-year yields traded north of 5% for most of the month. Higher rates may be problematic for consumer spending and business investment, as well as several business sectors including the housing market.
  • Tighter credit markets. According to a recent survey from the National Federation of Independent Business, more small businesses reported difficulty accessing credit in September compared to the previous month. The inability to secure capital could lead to a pullback in business investment and hiring.

If these concerns come to fruition, financial markets and the economy might falter accordingly. On the other hand, an economic slowdown could alleviate the need for further Fed intervention, paving the way for future interest rate cuts.

What This Means for Investors

Although recent GDP data is encouraging, these growth rates may not be sustainable as underlying economic concerns create pressure for consumers and businesses alike. While a full-blown recession may not be imminent, many economists expect the economy to cool in the coming months.

Meanwhile, the Fed will decide whether future rate hikes are necessary as new data becomes available. Despite holding rates steady since July, another increase is possible before year-end.

For investors, this lack of clarity may mean heightened market volatility in the near term. At the same time, November is historically the best month for the S&P 500. Indeed, strong performance from U.S. equities could help offset recent losses.

Ultimately, we don’t know what the future holds. However, we do know that patience tends to reward long-term investors. Those who maintain a diversified portfolio and stick to their investment plan typically fare better than those who attempt to time the market.

In the meantime, I encourage you to focus on what’s controllable—for instance, your spending habits, savings rates, and investment decisions—and avoid knee-jerk reactions to negative headlines.

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Is a U.S. Recession Looming?

Is a Recession Looming?

Since mid-2022, concerns about an impending recession in the United States have been making headlines. However, despite various warning signs and indicators, the U.S. economy has shown resilience over the past nine months.

So, what’s happening? In this blog post, we’ll explore the factors that have fueled recession concerns, discuss the current state of the U.S. economy, and examine whether investors should be worried about a potential recession.

Understanding a Recession

Typically defined as two consecutive quarters of contracting gross domestic product (GDP), a recession indicates a significant decline in economic activity. By this definition, the U.S. economy is not heading for a recession, as GDP grew by 1.3% in the first quarter of 2023.

The National Bureau of Economic Research (NBER) is responsible for officially declaring recessions. Its definition is somewhat vague but emphasizes significant and sustained decline in economic activity across various sectors.

Mixed Economic Signals and Concerns

Mixed economic data has economists divided on whether a recession is imminent.

The Federal Reserve’s projection of low GDP growth for 2023 and successive interest rate hikes have raised concerns about a potential economic decline. A minor banking crisis, resulting in the failures of some financial institutions, also fueled worries.

Moreover, inflation has remained above the Fed’s target, prompting rate hikes that affect corporate investments and consumer loans. As a result, analysts expect negative earnings growth for S&P 500 companies, while a tightened credit market has reduced lending to corporations and consumers.

Meanwhile, the yield curve has been inverted since the middle of 2022, as the yield on 2-year U.S. Treasury notes has exceeded that of 10-year Treasury notes. An inverted yield curve can be problematic as it frequently appears before an economic downturn.

And the New York Federal Reserve’s recession probability indicator, which uses the yield curve’s slope to predict U.S. recessions, suggests a 68.2% chance of a recession in the next 12 months—its highest reading in four decades.

Yet while some indicators have sparked concerns, the current strength of the U.S. labor market and economic activity has divided economists on the inevitability of a recession. In addition, positive earnings, as well as guidance from retailers like Walmart, indicate that consumer spending remains strong.

Though slightly below estimates, retail sales grew for the first time since January. The resilience of the U.S. economy has surprised experts, suggesting that a recession may be farther in the future than expected.

What Does a Possible Recession Mean for Investors?

While concerns about a U.S. recession persist, the economy’s current state and the labor market’s ongoing strength suggest that an immediate downturn may not be inevitable. However, in the event of a recession in the second half of 2023 or early 2024, investors need not panic. Historically, recessions have been relatively short-lived, with an average duration of around 10 months.

Economic downturns also tend to present attractive opportunities for long-term investors, with the S&P 500 generating an average return of 40% in the 12 months following the market’s low point during a recession. In addition, some stocks, such as Target, Walmart, and Home Depot, have historically performed well during recessions.

Thus, despite the potential risks, investors should take a long-term perspective and consider the historical patterns of economic cycles. Recessions, although challenging, have often paved the way for favorable investment opportunities.

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S2 E1: Will the Upcoming Presidential Election Impact Your Investments?

Financial Finesse S2E1: Will the Upcoming Presidential Election Impact Your Investments?

Why Staying In The Moment Doesn't Apply To The Stock Market

Today I’m so excited to kick off Season 2 of the Financial Finesse podcast, which I’m calling, “What Keeps You Up At Night?” Many of us are dealing with heightened anxiety these days due to a renewed surge in COVID cases, the uncertainty of the upcoming (and exceedingly contentious) presidential election, and a general feeling of instability in the world. 

In addition, people are nervous about what this election may mean for their investments and financial future–and for good reason. The media takes every opportunity to sensationalize what may or may not happen in November and beyond. That’s why in this episode I encourage listeners to take a long-term view. Stocks tend to rise more often than they fall, and moment-to-moment volatility is simply the price of investing in the stock market–regardless of whether it’s an election year. 

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S2 E1 Transcript: Will the Upcoming Presidential Election Impact Your Investments?

Welcome to season two of the Financial Finesse podcast. I’m Cathy Curtis, founder of Curtis Financial Planning, and a CFP®, focusing on the finances of female clients. I’m calling the second season, “What keeps you up at night?” Because let’s face it, there are a lot of things that keep us up at night lately. We’ve got rising COVID cases, an extremely contentious election, and just general uncertainty about what the future holds. Since the presidential election is right around the corner, I get a lot of questions from clients about what I think will happen to the stock market if the Democrats or Republicans prevail. So I thought I would start talking about that, for this first episode of the season.

To give a little perspective, the stock market has not done so badly considering the events of the year. The S&P 500, representing the 500 largest companies in the US, is up almost 8%. Now granted, this is largely due to the large mega cap tech stocks such as Facebook, Google, Apple, and Amazon. But many of us own those stocks in the mutual funds that we hold either in our 401Ks or other accounts. Smaller size US companies, as represented by the Russell 2000 index, are down about 2%. International stocks, as represented by the EAFE index are down about 7%. And emerging market stocks are up almost 2%.

So let’s go back to this question, do markets perform better under a Democratic or Republican administration? Well, yes, presidents do have a lot of power, but they really don’t control the stock market. Maybe to some extent they do because of the policies that are put in place during their administrations. But with all the factors affecting the staggeringly complex markets and the overall economy, presidencies don’t matter as much as they seem to during campaign season such as we are in right now, where you can’t get away from the election news.

The truth is that an argument could be made either way for each candidate. For instance, the consensus thought is that corporate taxes will rise if Biden wins, presumably bad for stocks. He would also most likely tighten federal regulations on auto emissions and the environment. Good news for alternative energy and electric car companies, not so good if you own shares of let’s say Exxon Mobil.

However, Trump’s environmental policies have been favorable to Exxon Mobil. Yet the company stock has been one of the worst performers of the year. If Trump wins, he will probably move further in lightening up the tax and regulatory burdens on corporations, helping stock prices.

On the other hand, Biden’s policies would boost the economy by improving public health, increasing American trade and engaging infrastructure spending that could give the economy a much needed boost and a chance to expand.

The fact is that stocks have risen and fallen under both Democratic and Republican presidents. And more often than not, they rise. Instead of focusing on the short term, which is the election, a much more important lesson from history is simply time in the market, not timing political cycles.

It still holds true that no matter the ups and downs, from 1929 to 2019, the largest US companies have generated annualized returns of about 10%. No doubt the volatility will remain high through the election season, and maybe after if the results are close. In this case, keep in mind a key concept of investing. volatility is just a characteristic of stocks. It doesn’t imply the direction of stocks. Volatility is the price we pay for the higher return stocks provide. And that most of us need to meet our goals. And it’s only temporary.

One common way to reduce anxiety in most areas of life is to stay in the moment. The exception to this I would argue is when thinking about the stock market. It really pays to take the long view and ignore the moment-by-moment activity.

Thank you for listening. And please stay tuned for my next episode of what keeps you up at night, which will be posted two weeks from tomorrow, Tuesday, October 20. And if you have any questions, please be sure and let me know via my email, cathy@curtisfinancialplanning.com, or on Twitter, @CathyCurtis, or on my Facebook business page, Women and Money. I’d love to hear from you and what’s keeping you up at night. Bye for now.

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Finglish Lesson #3: “Fiscal Cliff” and “Taxageddon”

Easy English Dictionary

Easy English DictionaryThe “fiscal cliff” and “taxageddon” refer to a convergence of fiscal events (or government spending and tax policies that influence the economy) slated to occur almost simultaneously at the end of 2012. If these terms aren’t on your radar yet, they are sure to be soon, as the media loves nothing better than drama and bad news and there’s plenty of that in this story.

The actors are the President, Congress, and U.S. taxpayers. The stage is the fragile U.S. economy. Like all good dramas, this one has lots of tension. The drama began decades ago when the U.S. started deficit spending, was exacerbated by the healthcare battle and the recent Great Recession, and came to a head last summer when the U.S. almost defaulted on its debt.

All kinds of political machinations took place to avoid a default—deals and compromises that were short-term stop-gaps, and all are coming due at the end of this year. You might say, “Surely the President and Congress can do something to stop Taxageddon?” Yes they can, but they won’t until after the November elections, leaving everyone at the edge of their seats—a true cliff hanger.

Hang on to your seats, and keep reading. Here is the fiscal cliff script:

  1. Tax rates for every income group will rise to levels not seen since 2001 (better known as the expiration of the Bush tax cuts). The current 10%, 25%, 28%, 33% and 35% rates will shift to 15%, 28%,31%,36 % and 39.6%.
  2. The tax rate on long-term capital gains will go from 15% to 20%. The maximum rate on dividends will increase to 39.6%.
  3. Some 3 million Americans will lose unemployment benefits.
  4. The Pentagon will start 2013 with a $55 billion budget cut; the budget for non-defense spending will be cut by the same amount.
  5. Soon after the beginning of the year, federal payments to doctors who treat patients covered by Medicare will be slashed by about a third.
  6. Higher-earning individuals ($200,000 for individuals and $250,000 for families) will be subject to an additional tax of 3.8% on all investment income: interest, dividends, capital gains, rents and royalties.

If all of these spending cuts and tax increases become reality, a significant slowdown (recession) is likely to result. This translates into continuing high unemployment, a volatile and downward-trending stock market, and generally unstable economic conditions.

In the final act, Congress and the Obama administration will fight it out over the last six weeks of 2012, negotiating, compromising, eliminating one thing, extending another, and once again avoiding disaster. But what remains to be seen is whether the U.S. economy will right itself or remain perched on the edge of the cliff.

How do you think this story will end?

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