After a positive first and second quarter which saw the S&P500 gain nearly 17%, the third quarter of 2023 reflects markets that are pricing in a different version of reality. The bullish sentiment of the first six months of the year faded in the wake of a sharply negative September, which followed a sell-off in early August and a sharp recovery later that same month.
For the third quarter, the S&P 500 was down 4.8% and the MSCI World Index ended 4.3% in the red. Behind these weak numbers is the realisation that at least some of the optimism for a broadly lauded soft landing and a pivot towards lower interest rates may be misplaced. Many market participants are now questioning whether high interest rates for a longer timeframe together with a recessionary environment are on the cards.
The market certainly has found many reasons to fret. While the US narrowly averted the threat of a government shutdown at the eleventh hour in September, another standoff is inevitable by mid-November. In addition, a strike by 25,000 workers at the US’s top three auto manufacturers and the resumption of student debt repayments after a pause during the pandemic may hit GDP in the next quarter.
Other factors that could hit economic growth include the lagging effect of higher interest rates, which are starting to manifest in the form of higher corporate borrowing costs and rising mortgage rates could soon start to effect housing markets. Outside of the US, there are also reasons for concern. Oil prices are soaring, primarily due to supply manipulation, while a slump in China’s economy is likely to impact growth across the world.
As many commentators have noted in recent weeks, the sort of soft landing calls we’ve heard throughout the year often precede recessions. That’s why some economists think it’s wise to consider that recession in the US is possible by early next year, although many of the same soothsayers predicted the same recession for early 2023. That said, there are also some reasons that a hard landing could be averted.
A quick resolution to the US autoworkers strike, the industrial incentives of ‘Bideonomics’, signs that inflation is coming under control—including lower wage growth—and artificial intelligence-fuelled growth and productivity are among the factors that could help the US to avoid the possibility of a recession. In fact, the irony is that interest rates are expected to potentially stay higher for longer as a result of the US labour market being too strong to allow wages to moderate, not a typical sign of a recession.
As we have noted in many of our newsletters, we don’t aim to forecast and time market movements. We remain confident that our long-term approach of following a coherently structured blend of quality-style funds and broad-based indexes will enable our clients to benefit from any growth in the markets, while also protecting them from a potential downturn in the fourth quarter, or the first quarter of 2024 if this hasn’t already been fully priced in.
On the South African front, the rand ended the quarter 0.5% weaker versus the dollar after having declined 0.3% for September. The ALSI was down 2.5% for September and 3.5% for the quarter. The impact of continuous load shedding, water interruptions, disrupted transport infrastructure and weak economic growth are now largely priced into the JSE and the rand, which have both underperformed significantly in 2023.
Going forward, all eyes will be on the Medium-Term Budget Policy Statement (MTBPS) on 1 November, when the Treasury will provide more detail about the state of the country’s finances and its plans to deal with our home-grown potential debt trap. This is covered in more detail in our MTBPS article in this quarterly, but it is safe to say that, with general elections looming in 2024, we are not optimistic that the finance minister will have the political cover to institute much-needed reforms.