2023 Q3 In Review - Integrity Wealth Advisors, Ventura & Ojai, California

A SURPRISINGLY RESILIENT ECONOMY DESPITE
A HAWKISH FED
2023
Q3
IN REVIEW
The financial markets faced significant challenges in the third quarter.
Equities struggled as a bearish sentiment took hold in recent months. The
initial momentum, driven by a disinflation narrative from October 2022 to July
2023, was overshadowed by less supportive storylines, leaving equities in a
precarious position amidst the resilient economy.
Despite efforts, inflation improvement remains elusive due to persistent wage
stagnation. While U.S. consumers didn't cause the pandemic-related price
surge, they are now demanding higher wages. This robust labor force is a
reason why the Federal Reserve is cautious in easing its policies, hinting at
a prolonged period of restrictive measures, which is impacting both equities
and bonds.
This tightening of financial conditions is happening in an economy that,
at the moment, seems capable of absorbing it. Consumers are financially
stable, employment markets are robust, corporate profits are rising, and fiscal
policies are surprisingly pro-cyclical for this stage of expansion. Consequently,
the rise in yields seems justified given the resilient economy and the hawkish
stance of the Fed. While the threat of a recession looms in 2024, for now, the
market's fate hangs on oil prices and the U.S. 10-year Treasury yield.
Traditionally, interest rates would be at new lows during this expansion
phase, stimulating the economy through refinancing and increased housing
demand. However, investors are now grappling with a gradual reduction in
liquidity, reflected in the narrowing gains across financial assets. Despite
healthy nominal economic growth, the ongoing contraction of money and
credit implies a limited shelf life for this prosperity. Investors remain skeptical
about the soft-landing theory unless there's a significant change in the current
scenario. The longer the economy stays resilient, the higher the chances of a
harsher economic downturn.
Real interest rates are higher, emphasizing the time value of money and
marking a departure from the post-2008 era of easy money. Consequently,
considering valuations is crucial in investment decisions. The era of pursuing
growth at any cost is becoming increasingly difficult to justify.
ECONOMIC CHARTS & NOTES
CONSUMER SENTIMENT Consumer sentiment improved in Q3, reaching its
highest level in nearly two years, although autoworker strikes and the government
shutdown added uncertainty. Retail sales picked up as American shoppers stayed
resilient.
US Retail Sales
Consumer Sentiment
EMPLOYMENT The U.S. unemployment rate rose to 3.8% (its highest level since
February 2022), a sign that the jobs market may be cooling. Job gains were better
than expected in August, led by healthcare, but June/July figures were revised lower.
Unemployment Rate
NonFarm Payroll
34%
100
16%
2200
US Retail Sales % Chg
28%
22%
16%
10%
4%
-2%
-8%
90
80
70
60
Consumer Sentiment
Unemployment Rate %
14%
12%
10%
8%
6%
4%
-825
-3850
-6875
-9900
-12925
-15950
-18975
NonFarm Payroll
-14%
Jan '19
Jul '19
Jan '20
Jul '20
Jan '21
Jul '21
Jan '22
Jul '22
Jan '23
50
Jul '23
2%
Jan ' 19
Jul '19
Jan '20
Jul '20
Jan '21
Jul '21
Jan '22
Jul '22
Jan '23
Jul ' 23
-22000
Source: University of Michigan Consumer Sentiment. Retail Sales - U.S. Census Bureau.
Source: U.S. Bureau of Labor Statistics