"Higher For Longer"
The Federal Reserve Chairman Jerome Powell’s comment that they will be keeping the fed funds rate “higher for longer” was the trigger for the down turn in the markets this quarter. The markets pivoted off year-to-date rallies ending the 2nd quarter of this year. Investors’ mindsets that lifted stocks out of a bear market earlier this year weakened as the 3rd quarter progressed and hopes for lower rates faded. Growth stocks that helped lead the new bull market rally in the first half of the year fizzled. Bond markets continued their now 3-year losing streak as interest rates rose to a 15-year high and bond prices dropped in sequence. The bright spot in this is that interest rates for savings and fixed income investments climbed, in which income investors earned more interest on their deposits and fixed income purchases.
At the end of the 2nd quarter, we were stating with great hope that a recessionary period may be avoided. Consumer spending and the job market were strong. It was reported that possible rate cuts would come in 2024, and the markets traded on this expectation. What happened was the contrary. Inflation remained persistent, easing a fraction of what was needed for future rate cuts to become a reality. The growth rally halted, and value stocks made a leap forward led by the energy sector with a rise in energy prices.
The concern is that a continued economic slowdown in the United States will most likely persist into 2024, leading to a recessionary period. The catalyst may be a narrowing of corporate profit margins, slowing of corporate spending, and continuation of the current employee layoff trend that is starting to reveal itself now. This is equal to a reduction in consumer spending that to date has been driving the economy forward despite higher interest rates and borrowing costs.
European stocks have performed in line with US markets. Tightening of monetary policy (rising interest rates) in Europe has already caused a slowdown trend led by stagnant lending growth. GDP growth in the UK and Euro Zone has not recovered from the 2019 COVID economic impact. Inflation continues to be persistent, leading the Bank of England and the European Central Bank to continue a “Higher for Longer” interest rate policy.
China’s economy has begun to recover as the governments massive stimulus policy takes hold. However, the Chinese populus remains cautious about recessionary pressures. The real estate market recovery has been moving at a snail’s pace due to the fallout from Evergrande Bank and the likes. Risk in the Chinese credit market continues to be high as the appetite for lending to stimulate the real estate market remains low.
These conditions set the stage for a rough 3rd Quarter. Most stock and bond allocations declined, impacted by higher interest rates and rising commodities prices. Bond yields climbed above past averages causing interest-rate sensitive investments to sell off. Mounted ambiguity about inflation elevated the odds of higher market volatility, because of global interest rate hikes and reduced market liquidity. The question remains, is it possible to have a soft landing to global markets and economies? This waits to be seen.
At Renew Family Wealth we continue to take steps to invest in line with our client’s tolerance for risk. We welcome the opportunity to assist in assessing how market and economic conditions are impacting you, your family, and those you know. Please do not hesitate to contact us to set up a meeting to discuss how we may be useful to you. Thank you for the opportunity to serve you.
Sincerely,
Renew Family Wealth
