Holiday Market Recap
Happy holidays! We wanted to drop one more update on how the markets are doing before you “settle down for a long winter’s nap.”
As you know, the markets endured some cold weather earlier in the fall. In September, the S&P dropped 4.9%.1 The autumn chill continued in October, when the markets dropped 2.2% and even briefly dipped into correction territory.2 (Defined as a drop of 10% or more from a recent peak.)
In November, however, the markets found something to be thankful for: A better-than-expected inflation report. The result was a major bounce back, with the S&P 500 climbing 8.5% for the month.3
As you know, the U.S. experienced historically high inflation for most of 2021 and 2022. Things peaked in June of 2022 when the Consumer Price Index – which measures the year-over-year price change of a wide variety of common goods and services – reached 9.1%.4 Since then, a combination of rising interest rates and improving supply lines gradually cooled prices down all the way to 3% this past June.4 (For reference, the Federal Reserve, which is tasked with keeping prices stable, aims for a 2% rate of inflation.)
Over the next three months, however, inflation crept back up to 3.7%, largely due to a rise in oil prices.4 This spooked the markets badly, as it worried investors that the Federal Reserve would keep raising interest rates, or at least keep them higher for longer. It also caused an influx of money into bonds. This drove up bond yields while simultaneously draining the stock market.
In October, however, inflation fell back to 3.2%.4 This was slightly better than expected, and it proved to be a shot of adrenaline for investors. Most analysts feel it means the Fed will not raise interest rates for the foreseeable future, as it appears inflation may already be coming back down again without the need for further rate hikes.
So, what does this all mean for us? Well, it’s undoubtedly good news, but it also signals a need for caution.
For one thing, it’s important to remember that cooling inflation does not mean that goods and services are getting cheaper. (That’s called deflation, and it can be even worse economically than inflation.) It simply means that prices are rising less and slower. Except under extraordinary circumstances, inflation is always going to be around. Low and stable inflation, the kind the Fed wants to see, is normal. As a result, though, cooling inflation tends to excite economists more than consumers, who may still feel profound sticker shock at the grocery store, the gas pump, or even when shopping online. That’s important because it can have a direct impact on consumer spending.
Spending is the lifeblood of our economy. That’s especially true around the holidays. Investors will be closely watching consumer spending as we round out the end of the year. If higher interest rates and still-higher-than-normal prices put a winter chill on holiday spending, investors may take it as a sign of an economic slowdown. That would certainly affect the markets negatively. On the other hand, if spending goes up or at least remains stable, we may see this market rally continue.
Either way, we should be prepared for more volatility in the months ahead. You see, we’re in an environment where the markets are hinging on every bit of new data and the release of every government report. In such times, investor sentiment can swing one way and then the other very rapidly. That makes the markets something like a swinging door. So, as we enter a new year, we must continue to be mindful when we step through the door…so that we never get taken by surprise or hit square in the face.
In the meantime, it’s always nice when the markets enter the holidays on an upswing. So, our advice to you? Forget all the noise and focus instead on what matters most: Spending time with family and friends. Devote more care to hanging your stockings by the chimney – our team will be here to mind everything else.
As one year draws to a close and a new one approaches, we will continue to monitor the markets carefully. If there are any changes we need to make or developments we need to inform you of, we will do so…even faster than a reindeer-driven sleigh. And, as always, please let us know if you have any questions or concerns. We may not be able to slip down a chimney to answer them, but our door is always open…and our inbox, too!
Happy holidays!
1 ”S&P 500 dips after US inflation data, ending weak third quarter,” Reuters, https://www.reuters.com/markets/us/futures-climb-treasury-yields-ease-ahead-key-inflation-data-2023-09-29/
2 “Wall St closes higher on eve of Fed decision,” Reuters, https://www.reuters.com/markets/us/futures-mixed-after-previous-sessions-rally-fed-meet-focus-2023-10-31/
3 “Goldilocks meets Santa as global stocks power to best month in three years,” Reuters, https://www.reuters.com/markets/global-markets-monthend-2023-11-30/
4 “12-month percentage change, Consumer Price Index,” U.S. Bureau of Labor Statistics, https://www.bls.gov/charts/consumer-price-index/consumer-price-index-by-category-line-chart.htm