If you’ve been paying attention to the headlines, you know that September was a rough month for the markets.  The S&P 500 finished down 4.9%, making it the worst month of the year.¹  For the quarter, the S&P dropped 3.6%, while the Dow lost 2.6%.¹ 

What’s behind this surge in volatility?  While it’s easy to see all these numbers and headlines and feel overwhelmed, it might be helpful to think of the markets as a knotted-up ball of string.  By slowly tracing the string backward, we can gradually untangle it.  By doing that, we can discover the markets’ recent performance is based largely on a series of causes and effects, each leading into the next.  So, in this message, let’s unravel that string together and make sense of what’s going on. 

Cause: Reduced oil production by Saudi Arabia, Russia, and others → Effect: Higher oil prices   

In June, Saudi Arabia – second only to the United States as the world’s largest oil-producing country – announced it would cut its production by one million barrels per day.²  Several other nations, including Russia, followed suit.  All told, these cuts total around five million barrels a day.  Prior to this, oil prices had slid by nearly 15% over the previous seven months.²  These countries wanted to reduce supply to drive prices back up.  Initially, the cuts were only supposed to last for one month, but they have since been extended.  The law of supply and demand holds that when supply goes down and demand does not, prices go up.  Due to these cuts, oil prices have risen to their highest level since November of 2022.³  This, in turn, has driven up the cost of gasoline. 

Cause: Higher oil prices → Effect: Rising Inflation

As you know, many goods and services depend on oil and gas.  Higher prices make certain types of transportation and manufacturing more expensive for businesses.  Anything that requires oil to be produced becomes more expensive.  Anything that requires oil to be shipped from one place to another becomes more expensive.  You get the idea.  These costs are often passed to consumers in the form of more expensive airline tickets, food, electricity…it starts adding up.     

We have a name for rising prices: Inflation.  Now, inflation is still down significantly from where it was earlier in the year.  (The inflation rate was 6.4% in January and dropped to as low as 3% in June.)  But it has ticked up again during the summer, rising to 3.7% in August.⁴ 

Cause: Persistent Inflation (plus resilient economy) → Effect: High Interest Rates

To combat inflation, the Federal Reserve has hiked interest rates to their highest level in decades.  Higher interest rates have helped bring prices down, but they also make things more costly for businesses.  As a result, investors had hoped that lower inflation would prompt the Fed to slowly reduce interest rates. 

Technically, rates have not risen in two months.  But since inflation is still proving stubborn – and since the economy is still growing – investors are coming to terms with the likelihood that rates will remain high for the foreseeable future.  Furthermore, if inflation continues to tick up, we may even see another rate hike before the year is out.   

Cause: High interest rates → Effect: Higher bond yields

The realization that rates are likely to remain high has led to a spike in bond yields.  In fact, the yield on 10-year Treasury bonds is currently at its highest level in 16 years!⁵  You see, when interest rates go up, the price of existing bonds usually falls.  That’s because investors can buy newly issued bonds that pay higher coupon rates than older bonds.  As a result, if bond owners want to sell their older bonds, they must do so at a discount.  When bond prices go down, bond yields – the return an investor expects to gain until the bond matures – go up. 

Cause: High bond yields → Effect: Less attractive stock market

Rising yields tend to make bonds more attractive to some investors.  Bonds, especially US Treasuries, are often seen as more stable and less volatile compared to stocks.  So, when investors feel they can get a decent return with less volatility, that tends to cause money to flow out of the stock market and into the bond market.  The end result: Stocks go down. 

We traced the string and discovered some of the causes and effects currently driving the stock market. 

One more possible cause-and-effect to keep an eye on

Now, to be clear, this string doesn’t cover every factor beneath the current volatility.  For example, higher gas prices and rising inflation tend to also decrease consumer spending, the lifeblood of our economy.  Should spending go down, that would lead to lower quarterly earnings for many companies that trade on the stock market. 

To-date, consumer spending has been steady enough to keep the labor market strong and our economy growing.  (The economy grew by 2.2% in the first quarter of 2023, and 2.1% in the second quarter.⁶)  Data for the third quarter won’t be released until the end of October, but, as of this writing, the Federal Reserve projects even higher growth for Q3.⁷  The fear that some investors have, however, is that higher prices will lead to a drop in consumer spending. This, of course, would lead to a more anemic economy.

Now, in some respects, this is actually what the Federal Reserve wants.  A drop in consumer spending would force companies to lower prices on the goods they provide, thereby decreasing inflation.  But it’s a fine line the Fed has to hit, rather like a parachuter trying to land on a very small target.  If the economy slows too much, that will cause a recession. If it doesn’t slow enough, that would cause stagflation – a situation where the economy becomes stagnant even though inflation remains high. 

Stagflation is rare, and currently, we’re nowhere near it.  In fact, we’ve only had one significant period of it in living memory, which occurred all the way back in the 1970s.  But since the markets move largely on what could happen – not what is currently happening – the fear of stagflation may also be contributing to the recent volatility. 

So, that’s where things stand.  As you can see, there is a lot to monitor right now.  Over the coming months, investors will be poring over every bit of data that comes out of the government for hints of what might come down the road.  Meanwhile, the markets may well remain volatile for some time. 

Our team keeps a close eye on the markets, the economy, and our clients’ portfolios so they don’t have to. 

We hope you enjoy the autumn season!  Get out there and experience the fall colors, the crisp air, and the taste of pumpkin in seemingly every drink you order.  And, if you ever have any questions or concerns, please let us know.  We are always happy to address them. 

Have a great autumn!     

Can you believe summer is already over? 

It seems like only yesterday we were celebrating the New Year, and now we’re in autumn!  Before we know it, the holiday season will be upon us once again.  It’s a reminder that time really does fly, especially as we get older. 

Before you start thinking about Thanksgiving dinner, digging out any decorations, or even welcoming Trick-or-Treaters, there are a few financial tasks we suggest you take care of first.  Don’t worry – they’re not difficult!  In fact, you may have handled most of them already…and some may not even apply to you.  But each task is an important step to take before the end of the year…which, of course, will be here in the blink of an eye.    

1. Review your 401(k) and IRA contributions.  One of the most important things you can do for your finances before the end of the year is to make sure you have maximized your contributions to any retirement accounts you own.  This is especially true of your 401(k) if you have one.  All contributions to your 401(k) must be made by December 31 if you want to deduct them from your 2023 taxes.  In addition, it’s important that you at least contribute enough that you can take advantage of any company matching. 

As a reminder, the 401(k) contribution limit for 2023 is $22,500.¹  (People over the age of 50 can contribute an additional $7,500 if they desire.¹) 

With IRAs, you technically have a little more time – all the way up until next year’s tax deadline, which is April 15, 2024.  But our advice is to take care of those contributions now, if possible, as it’s easy to forget in the hustle and bustle of the spring tax season.  (Contributing earlier can also help you potentially take advantage of certain Roth IRA conversion strategies, but this is something we should talk about personally, so we won’t go into detail about that here.) 

By the way, the IRA contribution limit for 2023 is $6,500.¹  (Those over the age of 50 can also make an additional $1,000 in “catch-up contributions if they are behind in saving for retirement.¹)

2. Consider your charitable contributions.  These days, more and more people are starting to think of investing not just as a way to help themselves, but to help their communities.  That’s especially true around the holiday season. 

But charity isn’t just about giving back.  It can bring tax benefits, too!  In fact, there are several charitable gifting strategies that investors can take advantage of.  But it’s important to start thinking about this sooner rather than later if you want to be savvy about it.  A few things for you to consider:

• Have you maxed out your charitable donations for the year?
• Are you planning on contributing cash, stock, or other assets? 
• Can you take advantage of a Qualified Charitable Distribution (QCD)? 

If you have any questions about this or need help game-planning your own charitable contributions, please let us know.  We would be happy to help. 

3.  Review your estate plan.  When it comes to estate planning, most people prefer to simply “set it and forget it.”  But things can change over the course of time – even in the span of a single year!  That’s why we highly recommend everyone take a few minutes to look at their estate plan sometime in Q4 to see if anything needs to be updated.  Do you need to add or change beneficiaries?  What about successor or contingent beneficiaries?  Revise your will?  You get the idea. 

4. Get your “tax season appointment” scheduled now.  We know, we know – nobody wants to think about taxes now.  Still, it’s a good idea to reach out to your CPA sometime before the end of the year to get your appointments scheduled now…before the rush starts, and everyone is doing it.  Doing this in, say, December, is a quick and easy way to make your future self thankful.  

5.  Take out your RMDs.  For those over the age of 73, don’t forget to take your Required Minimum Distributions for the year!  Failure to withdraw the appropriate amount from your IRA will lead to a 25% penalty on the amount that should have been distributed.²     

6.  Review your cybersecurity.  Cybercrimes are a threat year-round but can rise during the holiday season.  That makes this a good time to ensure your anti-malware protection is up to date, that your passwords are sufficiently varied and complex, and that you remain on guard against suspicious phone calls, texts, and emails. 

So, there you have it.  Six simple things you can do before the end of the year to ensure you remain on track to reach your financial goals.  If you need help with any of these, please let us know.  In the meantime, we hope you have a great fourth quarter…and a happy holiday season!   

¹ “401(k) & IRA limit increases,” Internal Revenue Service, https://www.irs.gov/newsroom/401k-limit-increases-to-22500-for-2023-ira-limit-rises-to-6500

² “Retirement Plan and IRA Required Minimum Distributions FAQs,” Internal Revenue Service, https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs