Market drop (explainer inside)
There’s a lot going on with the markets and the federal government right now, so let’s discuss.
(Want a break from financial stuff? Scroll down to the end for a fascinating visual treat.)
What's going on with markets?
A combination of things.
Some negative news about home sales and consumer confidence created fresh concerns about the state of the economy.1
The reality of what high interest rates (that may go even higher this year) could mean for corporate profits is also setting in. Companies that have to refinance corporate debt at higher rates could see much higher interest payments, cutting into their performance.
And on top of all that is the latest round of fiscal drama in Washington.
All that uncertainty pushed markets into fear and selling mode.
What are markets going to do next?
That's hard to say.
Markets often bounce after a selloff as traders buy the dip.
We're kicking off a new quarter and positive news could cause stocks to rally.
However, bearish selling pressure could continue as investors recalibrate their expectations about how long higher interest rates could linger.
So, what's behind the ongoing budgetary drama in Washington?
Phew. It's complicated.
Many economists and politicians agree that federal spending needs to be reined in.
The problem is that no one agrees on when and where to cut.
The U.S. has a pretty big deficit issue.
The Congressional Budget Office (CBO) projects the federal deficit will rise to nearly $3 trillion per year in the 2030s, up from about $1.4 trillion in 2022.2
That large gap will continually add to the overall national debt (and interest payments) until it's addressed.
Critical deadlines like the passage of spending bills (or raising the debt ceiling) offer an opportunity for politicians to force a standoff and shine a light on the deficit. But operating in crisis mode isn’t the best for the economy or markets.
Government shutdowns are disruptive as offices close down, troops and workers go without pay, and regular government processes stop.
Debt ceiling standoffs risk defaulting on sovereign debt, which would spill over into global financial markets.
The CBO estimated that the 2018-2019 shutdown cost the economy $11 billion, $3 billion of which was never regained by future spending.3
Even near-misses can be costly as they inject uncertainty and distrust about government processes.
In its August downgrade of U.S. credit, Fitch Ratings emphasized its concern about how political polarization affects regular government processes in Washington.4
Here's the bottom line: the long-term effects of the latest crisis are likely to be muted.
There are a lot of factors (positive and negative) driving markets and this is just one of them.
However, we're likely to see a lot of volatility ahead as investors digest economic data and judge recession risks.
We’re watching markets closely as Q4 kicks off and we’ll reach out as needed. As always, don’t hesitate to call if you have questions.
Your Eagle Wealth Team
P.S. We promised something fascinating and here it is. Check out this short TED talk that takes us under the ocean to see some of the amazing creatures living below the surface.
When markets are stressful, it's good to take a break and appreciate just how large our world is and how many incredible creatures live in it.
The Week on Wall Street
Rising bond yields and government shutdown fears left stocks in mostly negative territory for the week.
The Dow Jones Industrial Average lost 1.34%, while the Standard & Poor’s 500 slipped 0.74%. The Nasdaq Composite index was flat (+0.06%) for the week. The MSCI EAFE index, which tracks developed overseas stock markets, fell 1.95%.(5,6,7)
Stocks Follow The Bond Market
The bond market drove stock prices for much of last week as investors fretted about rising bond yields. After beginning the week with small gains, stocks resumed their September decline amid weak housing data and a decline in consumer confidence. However, it was the jump in bond yields, which sent the 10-year Treasury yield to near a 15-year high, that may have most undermined investor sentiment.(8)
After a failed attempt at a rebound mid-week, stocks staged a Thursday rally on a pause in bond yield increases–a rally that extended into Friday morning on an encouraging core personal consumption expenditures (PCE) price index report. (PCE is the Fed’s preferred inflation gauge.) But the rally faded as traders fixated on a potential government shutdown.
Mixed Economic Signals
Amid recent signs of a labor market cooling (a hopeful sign for ending rate hikes), last Thursday’s initial jobless claims report showed only a slight increase of 204,000. That was the second-lowest reading since January and below economists’ expectations of 215,000. Continuing claims declined by 12,000.(9)
That same morning, the final estimate of second-quarter GDP was released, indicating a 2.1 annualized growth rate–unchanged from the previous estimate. However, beneath the headline number, consumer spending was cut to a 0.8 percent rise from its earlier estimate of 1.7 percent–a worrisome revision since consumer spending is the engine of the U.S. economy.(10)
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