As we near the end of the third quarter, the macroeconomic picture continues to show a resilient consumer, strength in the economy, steadily declining inflation, and a healthy labor market. As a result, the Federal Reserve left rates unchanged at its September meeting and raised economic projections. The Fed is forecasting GDP to grow by 2.1% this year and 1.5% in 2024. They cautioned that the battle against inflation was not yet over and indicated that another 0.25% rate increase was likely before year-end. This is expected to be the end of the current rate-hiking cycle and would be the 12th increase since March 2022.
Data from this most recent meeting points toward possible rate cuts in 2024, but overall, a higher-for-longer stance on interest rates to combat inflation. Projections show inflation will not approach the Fed’s 2% target until year-end 2025. Fed Chair Jerome Powell commented that a soft landing or no recession for the economy was still a plausible outcome but not necessarily the expectation.
While we have seen some weakness in the equity markets since the beginning of August, investors have benefited from these improved conditions. The S&P 500 Index is up just over 13% year-to-date, a stark contrast to this time last year when the same index was down nearly 24%, before finishing down 18% for the year. Rising bond yields (competition for short-term equity returns), future rate increases, and the possibility of a slowing economy (or even worse yet, a recession) will present headwinds for the remainder of 2023 and into 2024. Further gains from equities for the remainder of the year may prove harder to come by. However, the overall health of the market may be improving as the seven stocks that dominated the performance for the first half of the year more recently have been joined by others and performance has started to broaden.
Fixed income yields remain elevated, with the 10-year U.S. Treasury at 4.50%, a 16-year high. This compares to 3.70% this time last year and 1.35% two years ago. The yield curve also remains inverted, with the 2-year U.S. Treasury at 5.10%, compared to 3.95% this time last year and 0.25% two years ago. This inverted yield curve has drawn the attention of many, as it has often been an indicator of a future recession. While not all inverted yield curves lead to recession, all recessions have been preceded by an inverted yield curve. The lag time has often been 18 months or more; so, like Chair Powell has said, whether we see a soft landing remains to be seen.
While we seem to have gained clarity in terms of the near-term direction of the Fed, a somewhat cloudy outlook remains elsewhere. Higher-than-target inflation, higher interest rates, the potential decline in corporate earnings, a consumer that is beginning to show signs of weakness, and the ongoing saga of soft landing or recession will weigh on the equity and fixed income markets for the foreseeable future.
As always, your relationship team is here to meet with you in whichever way is most comfortable for you. We value your relationship and the confidence you have placed in Adirondack Wealth Management by choosing us as your financial partner.
Sincerely,