September 2023 Market Update

In this market update, Caleb Tucker, CFA®, Director of Portfolio Strategy, reviews this month’s market trends. Please read below to learn more:

“Let’s take a moment to step back and think about how far we’ve come over the last year. Inflation is headed in the right direction, and the Federal Reserve is at least close to ending their rate hiking cycle, along with a still healthy labor market. Inflation and rising interest rates were the primary drivers of the market volatility we experienced in 2022, but the directional moves this year of inflation coming down and interest rates leveling out have been huge contributors to this year’s market rally. This is good news, but we still need to be aware of the risks to this narrative.

First, there is still uncertainty about the future path of inflation. The most recent inflation report released in August showed a 4.7% increase in core prices (core prices exclude food and energy) from a year earlier. This continues to be an improvement, but there is clearly more work to be done. The August CPI report, set to be released on Wednesday this week, is expected to show a higher headline inflation number (which includes food and energy) relative to last month. Energy prices are up year to date, accelerating their increase since the beginning of July. The higher energy prices are driving expectations for higher headline inflation data and can eventually filter their way into higher prices for core goods and services.

Next, when it comes to interest rates, the reason higher rates cause market volatility is that higher rates constrain economic growth. Of course, the Federal Reserve increased rates to intentionally constrain growth and slow the rate of inflation. At the beginning of this year, the market had priced in a decrease in the interest rate set by the Federal Reserve to happen this summer, but this has yet to materialize. Market expectations have continued to push back when the first rate cut will occur. Why does this matter? In our view investment decisions need to be driven by a longer-term outlook, which in this case includes an expectation that rates will be higher for longer than many expect. These higher rates are likely to mean the stock market leaders of the next few years will not be the same as the last, and at the same time, they provide attractive opportunities for fixed-income investors.

When we entered this year, very few investors felt optimistic about the markets, for the inflation and interest rate reasons I just mentioned, yet market performance has defied expectations. This is a great example of the challenges associated with market timing and why investors’ efforts are better focused on ensuring the proper levels of risk are being taken to build an all-weather portfolio. While we remain aware of the risks present, specifically the risk of slowing economic activity because of higher rates, this doesn’t mean you need to take cover, but rather focus on having a well-diversified portfolio constructed to meet your goals.”

We hope you find this blog educational and informative. If you have any questions, please reach out to your Merit Financial Advisor. Thank you for being a valued client of Merit. ​​

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.