By Tim Courtney, Chief Investment Officer

As we wrap up the third quarter of 2023, the market and economic picture looks encouraging. Second quarter earnings generally exceeded expectations¹, Gross Domestic Product is trending positively² and the equity market has remained steady — avoiding any significant pullbacks from the gains realized earlier this year.³ However, as we transition into the fourth quarter, there are several key factors Exencial will be closely watching:

The Direction of the Economy: We started 2023 under the assumption that the economy would likely enter a recession by the end of the year. However, the economy has actually exhibited signs of modest strength over the past three quarters. As we wrap up 2023, we’re hoping to get a little more clarity on the strength of the economy and whether it's growing fast enough to stave off recession.

At Exencial, we initially estimated economic growth would be relatively flat this year, but data now suggests we could close 2023 on a slightly more positive note.⁴ Keep in mind that it’s going to be difficult to get any great clarity on the economic outlook because we’ve been living in a world of extremes. Money supply has oscillated between unprecedented expansion and contraction, and we've seen interest rates climb in the most rapid rate-hiking cycle in history. As a result, economic data is likely to continue to jump all over the place.

The Outlook for Interest Rates: At the outset of 2023, markets were braced for interest rate cuts, mirroring broader economic pessimism.⁵ That scenario, however, has not materialized. With GDP likely to end the year on a positive note and inflation rates hovering above 3%⁶, the Federal Reserve has little justification to lower rates.

The real question now turns to the likelihood of further rate hikes. The outcome will largely hinge on where inflation lands in Q4. While the equity market has been clamoring for a rate cut in 2023, it’s probably not going to happen. Should rates continue their upward climb in the last few months of the year, investors should be prepared for potential volatility.

Government Policy: The regulatory landscape is also raising some critical questions in the home stretch of 2023. As Big Tech continues to outperform, the Justice Department has recently initiated an antitrust case against Google, signaling a regulatory crackdown.⁷ While efforts to rein in these tech behemoths under existing antitrust laws have been unsuccessful to date, government agencies are likely to double down on their efforts in the near future.

In an unusual move, Fitch Ratings downgraded the credit rating of U.S. debt in August, citing a record increase in government spending.⁸ Historically, increased government spending served as a counterbalance during recessionary periods. However, we now find ourselves in an environment where government spending is accelerating, despite the slightly positive economic growth this year. This new regulatory paradigm has broad implications, affecting everything from interest rates to inflation.

2023 has proven to be a very different year than anticipated. With just a few months left in the year, we’re still navigating muddy waters, with more questions than answers when it comes to the economy and monetary policy. As we’ve reiterated throughout the year, the best strategy in this environment is to remain diversified. If you have any questions or concerns about your portfolio, don’t hesitate to contact your Exencial advisor.

Sources:

1. Axios (8/18/23) — Big companies rake in stronger profits than expected in second quarter
2. CNBC (7/27/2023) — GDP grew at a 2.4% pace in the second quarter, topping expectations despite recession calls
3. S&P Global (9/21/23) — S&P 500 performance chart
4. Federal Reserve Bank of Philadelphia — Third Quarter 2023 Survey of Professional Forecasters
5. CNBC (1/31/23) — Why the case is growing for a Federal Reserve interest rate cut before year end
6. U.S. Bureau of Labor Statistics (9/13/23) — Consumer Price Index summary
7. NPR (9/12/23) — United States takes on Google in biggest tech monopoly trial of 21st century
8. CNN (8/2/23) — Fitch downgrades U.S. debt on debt ceiling dama and governance worries

PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971. 

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living. The CPI is one of the most frequently used statistics for identifying periods of inflation or deflation.