Weekly Market Outlook

Traditions Wealth Advisors is starting a new series of weekly updates to our economy. We hired a new student intern to fulfill this need for our clients. Brien L. Smith, CEO of TWA, and Kristina Badrak, Economic Analyst Intern, will be informing you weekly of updates in the current market. Below is week 1, September 27, 2023:

In light of recent market fluctuations and continuous hikes in interest rates, there is a growing apprehension about a potential recession on the horizon. In this monthly edition of the TWA newsletter, we offer insights into the prevailing economic and financial market conditions and any implications it carries for investors.

• Drawing from the Fed’s history of rate hikes, the U.S. interest rates have surged to unprecedented levels that haven’t been recorded in the last 15 years. The economy is currently navigating a severe deceleration post-recession since 1970. Past events, such as the 1970s stagflation, the 1975 recession, and the 1982 downturn—which brought significant debt crises and stagnation in developing economies—highlight the risks of prolonged high inflation amidst weak growth. In an effort to prevent a repeat of these challenging economic times, the Fed is keeping interest rates high, tightening the economy to keep inflation in check.
• Government Shutdown: Congress faces a salient deadline on September 30th in regard to approving government funding. A failure to reach a consensus would lead to the furlough of ~800,000 workers, sparing only those deemed essential. This workforce reduction would result in decreased consumer spending, impacting the purchase of goods and services. The economic effect of a shutdown depends on its duration; however, to illustrate the potential impact, a similar occurrence in 2018 led to a 0.1% reduction in economic growth in Q4 and a 0.2% decline in Q1 of 2019. This even may also cause disruptions in publication of the U.S. economic data which will make forecasting difficult increasing market volatility and uncertainty regarding the interest rates.
• OPEC, controlling 40% of the global oil supply, exerts a considerable influence on energy markets. Decisions on oil production quotas and restrictions are amplifying the global energy crisis, making price per barrel soar to over 90 per barrel. With oil prices soaring, nations and industries worldwide, especially in Europe and the U.S., are struggling with increased energy costs. In the U.S., major oil corporations are consolidating power and limiting the operations of smaller acquired firms, a strategic effort designed to keep oil prices high amidst restricted supply.
• Labor unrest within the United Auto Workers is impacting the auto manufacturing industry, already lost production of ~16,000 vehicles. Wage disparities, triggered by the juxtaposition of carmakers' substantial profits evident from a staggering 36% increase in CEO compensations over a mere four-year span, and the stagnation of workers' earnings, has fueled widespread strikes in 20 states. According to Goldman Sachs, the strike is projected to affect the annualized economic growth by 0.05 to 0.1 percentage point, amplifying concerns over the broader economic impact of these labor disruptions.

Investments: With unstable conditions, market uncertainty prevails. The S&P 500 is down ~5.0% this month primarily attributed to its tech-heavy composition. Hence, diversifying investments across sectors and balancing portfolios with bonds and securities can minimize losses. A global multi-asset portfolio with 60% securities and 40% bonds is up 6% YTD (Chase). While this approach may mute returns, it will also minimize losses and lower the risk of the portfolio during these turbulent times. A study by Meir Statman in 1987 showed that a number of stocks in a portfolio had only a slight difference in portfolio’s standard deviation (risk) after ~12-14 stocks.

Sources: https://www.chase.com/content/dam/chase-ux/documents/personal/investments/mid-year-outlook-2023.pdf