As the year winds down, we see some changes in the markets and economy overall. We also see some trends setting up for the year ahead, and mixed messages about the likelihood of an impending recession.
Here are some of the main takeaways from Q3:
Bull Market or Bear Market Rally?
During the first half of the year, we saw an impressive rise in the stock market, potentially buoyed by the belief that the Fed would start to drop rates again.
But during Q3, some of that optimism waned, and stocks began to fall again.
Only hindsight will reveal if we truly entered a bull market, or if we were seeing a typical bear market rally, which is marked by a brief recovery period with an increase of 5% to 10% in stock prices. It is also possible that much of the stock market gains came from five companies who saw significant gains this year.
Another interesting marker is the 10-year treasury yield, which rose to its highest level in 16 years. This has had a big impact on bond performance, and we might see bonds turn around when rates do start to fall.
Whenever the Fed raises rates to tamp down inflation, we watch the economy more closely for signs of a recession. So far, despite tighter monetary policy, a banking crisis and global tension, the economy has remained strong. The job market is still healthy, and consumer spending increased again in the third quarter.
Whether or not we will see a recession in 2024 is very difficult to predict, but some rough patches might come up. While the economy looks strong now, we still might see the deeper effects of raising rates and higher prices over the coming year. Credit card debt is at an all-time high, student loan payments have kicked back in, and the cost of large purchases like houses and cars are still higher than average, especially in certain markets.
Inflation and Interest Rates: 2023 Q3
The current rate of inflation is at 3.7 percent, down from 8.2 percent last year. So while it has come down quite a bit, we still have a little ways to go until we hit the Fed’s target of 2 percent.
The Federal Reserve has raised interest rates 11 times in a year and a half, bringing rates to their highest level in 22 years.
The Fed hasn’t said what its next moves are, but most economists expect that they will start to drop rates in 2024. It’s a balancing act, because if they drop rates too fast, they run the risk of driving up the inflation rate again. But the longer rates remain high, the more of a significant impact it could have on consumer spending, increasing the odds of a recession.
Only time will tell what next year brings, but for now, it might be a good idea to hold off on large, expensive purchases, and have a solid financial plan to keep your money on track in 2024.
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