Weekly Market Update: November 6, 2023
The U.S. economy performed very well in the third quarter, with the gross domestic product (GDP) advancing at an estimated annualized rate of 4.9%. That figure was more than double the respective first and second quarter gains of 2.2% and 2.1%. The primary catalysts were the consumer sector, which expanded at a 4.0% clip and, to a lesser extent, government spending.
Third-quarter GDP growth is expected to be the high-water mark for the near future. That is because the full effects of the Federal Reserve’s most restrictive monetary policy course in four decades are still working their way through the financial system. Credit markets have tightened, as the central bank has raised the benchmark short-term interest rate five full percentage points since early 2022 and continues its monthly selling of $95 billion of government-issued Treasury notes and mortgage-backed securities.
The Fed was expected to hold interest rates steady at its latest Federal Open Market Committee (FOMC) meeting, which was to conclude shortly after we went to press with our print editions. However with inflation still quite sticky, the lead bank will likely keep the federal funds rate high for a longer period to try to lower demand for goods and services and put further downward pressure on prices. The Personal Consumption Expenditures (PCE) Price Index, which is the assessment of inflation most closely tracked by the Federal Reserve, rose 3.4% in September, a pace that is still above the Fed’s target rate of 2.0%.
Meantime, at the halfway point of third-quarter earnings season, nearly 80% of the reporting S&P 500 companies had posted better-than-expected profits. However, the accompanying prognostications have failed to impress, and investors seem to think further revenue and earnings gains will be harder to achieve in the near term, as businesses and consumers are faced with higher borrowing costs and lingering inflationary pressures. With valuations a bit elevated coming into earnings season, even a modicum of disappointing news was likely to lead to increased market volatility.
Conclusion: Wall Street typically doesn’t like uncertainty. Thus, with questions still unanswered about when the Fed will eventually reach its goal of taming inflation, and rates likely to remain elevated, sustained stock market gains may prove elusive in the near term.