Monthly Outlook October 2023

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September at a glance: What you need to know

• The S&P posted a nearly 5% drop in September, making it the worst month in 2023, as investors grappled with the Federal Reserve's "higher for longer" stance on interest rates coupled with a looming government shutdown at the end of the month.
• Oil hit $95 per barrel, rebounding strongly in recent months and raising the possibility of higher inflation readings in the coming months. Fixed income investors now have lower odds of rate cuts in 2024.
• Stock markets fell, with some light filtering through in the form of strong IPOs from Arm, Instacart and Klaviyo. However, some of the initial gains were reversed in other sessions. We do not believe these are a sign that the IPO market is making a comeback, especially given other economic indicators.

Macro Corner

The S&P 500 posted its fourth consecutive week of losses, culminating in a nearly 5% drop in September, the largest monthly decline since December. The Fed's announcement of sustained higher interest rates, rising crude oil prices and concerns about a greater supply of government debt have pushed bond yields higher and stocks lower. Economic pressure from less-than-ideal economic indicators continues to affect markets as nervousness about recessions returns to investors' minds.

In addition to economic uncertainty, the United States ended the month on the brink of a partial government shutdown as the fiscal year ends without Congress passing needed appropriations bills or a continuing resolution. While shutdowns have occurred twenty times since 1976, the potential economic impact remains a concern. Each week of a shutdown can reduce GDP by approximately 0.2%, although most of this loss is usually recovered once a funding bill is passed. Moody's has warned that recurring government dysfunction in Washington could negatively affect credit ratings. This shutdown will also halt the release of important government economic data, leaving both investors and the Federal Reserve uninformed.

Oil markets have spooked investors as oil hits $95 per barrel driven first by deepening supply cuts by Saudi Arabia and Russia and then by falling inventories. The latest data from Cushing, Oklahoma, the country's main oil storage hub, shows a sharp drop in inventories, exacerbating concerns about global supply shortages. In fact, crude oil has soared about 40% in the past three months.

Further reductions at Cushing could exacerbate challenges for the already tight oil market. Inventory levels there have halved since June, currently hovering just below 23 million barrels. If these levels fall below 20 million barrels, oil could become thick and difficult to extract, which could push prices even higher and stoke inflation fears. Oil prices play a key role in driving inflation. Current projections from Goldman Sachs suggest that Brent crude, the international benchmark, could average $100 per barrel in the coming year.

This estimate is an increase from its previous forecast of $93. This trend indicates that relief from high gas prices may not be imminent. Driven by a 30% increase in oil prices, gasoline costs have peaked by 2023. In 11 states, drivers are now shelling out an average of $4 or more per gallon. Goldman Sachs attributes this to a combination of reduced OPEC supply and increased demand outpacing the increase in U.S. supply.