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We like the idea that the fun of writing about financial markets is the challenge to piece together a puzzle with moving parts. Sometimes those parts fit together neatly. But the current period is not one of those times. In this presently complicated puzzle, the U.S. economy and financial markets are still struggling with the aftermath of the pandemic disruptions.

We expressed concern from the outset of 2023 that the stock market would need time to sort itself out. We were somewhat surprised in the first half of the year when investors – especially in technology – brushed aside all the various issues and concerns. We are not surprised by the downturn in the third quarter as investors took a pause to assess the many difficult realities.

The concerns are multifold. Inflation has subsided but is not subdued. The Federal Reserve will keep rates at their current levels for an extended period and may even raise them higher again. As a result, the threat of recession is still real.  The political turmoil in Washington and strong likelihood of government shutdown add to the economic anxiety.

We expect the market to be nervous for the remainder of 2023. It will probably fluctuate around without clear direction. Our posture with client portfolios is defensive and cautious. As always, we look for stocks that can weather through uncertainty and have potential to show gains as hopefully the puzzle pieces come together more neatly and clearly in 2024.

The Economy:

Much of the economic data suggests the economy is headed for a controlled or so-called “soft landing.”  Labor markets are healthy but cooling. Wage growth is moderating. Consumer and business spending is slowing. One relatively optimistic forecast is that U.S. GDP growth will be about 2.2% in 2023 and then slowing to 1.3% in 2024. This forecast exists even though the Federal Reserve has moved interest rates to a range of between 5.25% and 5.5%, the highest in 22 years. One group of financial analysts believe the economy will avoid recession.

However, other analysts are less sanguine and point to imminent risks in the picture. The Fed seems intent on keeping interest rates at their current level until inflation is more clearly subdued. There is even the likelihood of another 50-basis point hike in rates.  The impact of higher rates may not have been fully absorbed yet. Then we have the triple threat of an economic drag created by the resumption of student loan payments, a government shutdown, and a prolonged auto worker strike. All of these domestic concerns come parallel to the obvious economic slowing in Europe and China. At Hudson Advisors, we look at this whole picture and conclude that recession is still quite possible in 2024.

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