We have a lot going on in the economy, politics, and corporate news over the next several weeks. A quick update is in order.
First, let’s revisit the unusual dichotomy in the stock market this year. Through today, the S&P 500 Index, which overweights the largest companies in the index, is up 17% year-to-date. The equal-weight S&P 500 is up only 5% for the same period. A handful of large tech companies, aka “The Magnificent Seven”, have provided nearly all the returns of the cap-weighted index as the enthusiasm for artificial intelligence spurs buying at any cost. Our moderate/prudent exposure to this area has our returns in between the two results.
Businesses across all industries are anticipating several headwinds in the fourth quarter. Policy analysts assign a 75% likelihood of a government shutdown at the end of September as members of Congress dig in their heels regarding budget/spending. This does not usually have a big market impact but can be a drag for impacted businesses.
Oil prices are climbing due to production cutbacks by Saudi Arabia and OPEC partners. There is also a shortage of refinery capacity in Europe and North America. This comes at the same time that China’s fuel imports are picking up, increasing overall demand. Fuel prices are expected to face upward pressure through the fourth quarter.
Student loan repayments restarted this month, as you have likely heard, and will put a damper on consumer spending. Less discussed is the IRS pullback on Employee Retention Tax Credits, which have aided small businesses. Small businesses have been the primary engine of job growth in the US, so this may slow new job openings. Employment will also be impacted by the Sept. 30th end of government aid to childcare facilities. Many childcare operators will be forced to sharply raise costs or possibly close, impacting parents’ ability to work and exacerbating labor shortages. Women’s workforce participation rate just hit a record high but may drift lower with this change.
Ironically, these negative impacts for consumer spending and employment may boost the stock market. We have been watching the Federal Reserve and analyzing whether further interest rate increases will be required or perhaps they have finished their tightening efforts. This could be a classic “bad news is good news” situation if the Fed sees the impact of these headwinds and decides they are done, or maybe even considers possible interest rate cuts in the not-to-distant future.