Q3 2023 Commentary - Summer is Over

This summer felt like a return to normal, a respite from years of nonstop abnormality. The pandemic (mostly, hopefully) has faded from day-to-day life. California’s wildfire season was thankfully minor. The news was the news, but at least it remained mostly in the background.

The stock market supported the positive vibes with steady growth. Strong data on inflation, the economy, and unemployment lifted hopes that the Fed’s dramatic rate increases may have a smoother-than-expected resolution.

Then September spoiled the mood. September is the only month with more negative S&P 500 returns than positive. Perhaps, the market internalizes everyone’s dismay about summer’s end.

Countless inputs influence the stock market. Still, two main issues have driven recent action: whether (1) a recession is coming and (2) inflation will normalize.

The signals on both are conflicting. On the one hand, stocks have declined recently like a recession is near. On the other, oil prices are rising, and unemployment is falling.

On the one hand, interest rates are rising like inflation will persist. On the other, gold is falling, and housing prices are rising.  

The unusual crosscurrents are lingering effects from the extraordinary economic experiments of recent years – pandemic-induced government spending, supply chain shocks, and aggressive Fed rate rises.

Much of the market’s action hinges on untangling how these issues will unfold.

And despite September’s declines fueling pessimists’ loud certainty, no one knows. As famous investor Charlie Munger said, “if you’re not confused, you’re not paying attention.”