Digesting ‘Higher For Longer’ as the Quarter Ends

Stocks in the benchmark S&P 500 Index are on pace for another weekly decline, and the reason why is largely a holdover from last week’s signal from the Federal Reserve that the cost of capital will remain “higher for longer.”

In addition to digesting the Fed’s position, this week was marked by political and social risks, including the near-certainty of a government shutdown and the ongoing and increasingly negative strike by the United Auto Workers.

In our latest monthly newsletter, I went into detail about why the government shutdown isn’t likely to be a big issue for markets or the economy in the long term. However, short-term fluctuations in stocks are always likely when uncertainty of the sort in Washington is present (and unfortunately, that’s increasingly the case these days).

Now, today is the final trading session for the third quarter, so let’s take a quick look at the chart here of the major domestic averages in Q3.

As you can see, it was a tough quarter for domestic stocks, as the July move higher morphed into an August and September slide. A move out of mega-cap tech stocks in the face of rising bond yields and continued hawkish monetary policy were two of the culprits.

Continued strong economic data (especially on the jobs front) has kept the Fed hawkish, and the still-hawkish Fed pushed out expectations for the first rate cut into the second half of 2024, and I suspect that’s going to continue to weigh down any bullish rebound into Q4.

On the plus side, good economic data can translate into good Q3 earnings. If we start to get good earnings when reporting season begins, then that could be an upside catalyst for stocks toward year-end. And that upside could be very strong given the declines we saw in Q3.

So, will we see that move higher in Q4? The answer will be in the data, and that’s why we will continue to monitor all the action for you — and we’ll continue to make tactical moves intent on taking advantage of current conditions while also making sure we are fully invested in the best-of-breed dividend-paying stalwarts.