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Market Recap – October 23, 2023

Keel Point

October 23, 2023

The discussion on soft landing and recession is heating up as to whether the Fed “needs” to create a recession to wring out the last bit of inflation. 

  • GDP growth is averaging 2.1% in the first half of 2023 and expected to be 3.5% (annualized) in the third quarter – July-September 2023. The most recent Atlanta Fed GDP Now has it at 5.4%.  On June 27, 2023, the expectation for Q3 growth was 0%. 
  • Forty-three years ago, former Fed Chair Paul Volcker demonstrated that recession was the way to conquer inflation. That view has remained with Fed leadership who seem less patient about giving more time for their actions over the last 18 months to work themselves out.
  • Inflation has fallen to 3.7% in September from its 9.1% high in June 2022, with the most recent 3-months annualized inflation rates ranging between 2.5% and 3.5% — very close to the Fed’s 2% target.
  • While “goods” inflation is back to pre-pandemic rates, “services” inflation is not, in large part because of the way the “shelter” (housing) component of inflation is calculated. Declining housing costs are not fully reflected in official inflation reporting.
  • Our own view is that inflation will come down more quickly than many believe, but that we will have a recession sometime early next year, albeit a shallow and short-lived one.

The rise in intermediate- and longer-term Treasury rates has roiled equity markets with the S&P 500 down 8% since its July 31 high.  The outlook for the remainder of 2023 and 2024 remains positive for earnings growth and stock prices.

  • The yield on 10-year U.S. Treasury notes has increased by 25% from July 31 through last Friday – rising from 3.96% to 4.92% — bringing S&P 500 prices came down 8%.
  • Until the Fed started raising interest rates 19 months ago, the real return on owning U.S. Treasury securities was largely negative. Today, a 5.5% yield on a 3-month T-Bill, or a 5% yield on a 10-year Treasury, compared to a 3-month annualized inflation rate of 3% provides a 2% to 2.5% real rate of return which becomes problematic for equity markets.
  • Q3 S&P 500 earnings are coming in better-than-expected vs the Bloomberg consensus, with 20% of companies reporting so far. Q4 earnings growth is projected to be 7.6% and the 12-month outlook for earnings growth remains at 12 percent. 


Disclosure:  Securities offered through Keel Point Capital, LLC, Member FINRA and SPIC.  Brokerage and Investment Advisory Services are offered under the Keel Point brand. Investment Advisory Services offered by Keel Point, LLC, an affiliate of Keel Point Capital, LLC. While reasonable efforts have been made to provide data from sources considered to be reliable, no guarantee of accuracy is given. Keel Point does not give tax, accounting, regulatory, or legal advice to its clients.

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