By: Russ Colbert
Fall 2023 (Vol. 41, No. 3)
What is the economy and the markets looking like these days? Treasury interest rates and many fixed rate investments are up substantially from a year ago. The stock market, after a big rally, has stumbled lately. The real economy seems to continue to chug along, even accelerate at times while inflation has come down substantially compared to a year ago. But it will most likely start to rise again due to rising oil prices if they continue to go up. The real economy has remained stronger for a longer time than expected so far. The economy grew during the second quarter at a 2.4% annual rate. The 3rd quarter has been projected so far by the Atlanta Federal Reserve to be stronger. Unfortunately, we will not have the 3rd quarter GDP figures for several more weeks.
We do not think inflation is going to reach the Fed’s target rate of 2.0% anytime soon. Now, inflation is down substantially from a year ago when it was 8.5% as of this past summer of 2022 and around 3.8% over this last summer of 2023. That has been pretty good news over the past year. But given the recent spikes in oil prices, look for that to increase a small amount. Hopefully, even with the oil spike as mentioned above, some of the experts are predicting 3rd quarter GDP figures to come in above 3.0%. If that happens that will be continued improvement over this year. We will have to wait and see how the figures add up over the next several weeks. For several reasons, we believe the Fed may not raise interest rates at the next Federal Reserve meeting. However, going forward the Fed could raise interest rates once or twice more if the inflation rates don’t continue to move downward toward the 2.0% target.
Many investors think that with an unemployment rate near 3.5%, that the economy will avoid a recession. Several recessions in the past started when the jobless rate was at or near a low. Most recessions come about because of mistakes. For example, too much optimism given the underlying economic conditions and the need for economic activity to adjust back downward. Soon consumers are going to be without the temporary extra purchasing power generated by COVID spending programs. Businesses are starting to face labor costs that continue to rise faster than are justified by productivity growth, while business investment may have a pullback or correction in the near term. Government policies enacted over the past several years have not boosted long-term growth prospects, and AI being a longer term positive, is unlikely to generate enough extra growth in the short term to offset a downturn in the near future.
For now, I believe we are stuck in a trading range of up and down 5 to 10 percent. To break out of this range, we will need strong earnings and more positive economic news to move into higher territory and break into a higher range of stock prices. We currently have a monetary policy that is tight enough to bring inflation down to 2.0% but could add to a bumpy ride into next year. There are positives and negatives with this economy. Hopefully, a year from now we will have elected enough responsible leaders of this country. They will be needed to make the changes required for a financially healthy and fiscally responsible government needed to control the runaway spending and rising deficit. Then, we should see this economy improve, and investments grow higher in value.
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Senior Portfolio Manager
Advisory services offered through Royal Palm Investment Advisors, Inc., a Registered Investment Advisor.