The economy at present seems to be holding steady in a remarkably durable growth path. Despite the absence of important economic data from some of the temporarily shut down government reporting agencies, there are private sources of reliable information to draw from. We recently reported that the economy was slowly softening. This occurred in no small part because of the earlier sometimes erratic and significant policy changes in the administration that caused many companies and consumers in general to curtail spending plans. That effect has decisively abated as the policy turmoil has subsided. The economy seems to have weathered it fairly well.
One of the most important factors affecting the future direction of the financial markets is the level of interest rates established in part by the Federal Reserve. The Fed has been very tentative in making changes during the market turmoil earlier in the year and is hesitant to provide any additional easing given that inflation remains significantly above their inflation targets. This morning the Department of Commerce release the inflation report for September which shows that prices remain near 3% higher than one year ago. The other available economic indicators suggest that the economy, in general, and consumer spending, in particular, continue to grow despite concerns about the labor market. The Fed has another meeting at the end of this month in which they will make adjustments if necessary and give their future action forecasts.
Our outlook remains that the market will trend upward in a choppy pattern though less volatile than in the first half of the year. Even though the economy continues to soften somewhat, inflation remains stubborn. We do not foresee a downturn at present but, if inflation resumes a downward trend and interest rates come down in response, the market will certainly move higher in response. And let’s not forget that we are in the midst of a technological revolution and boom that continues unabated. We’ve been through speculative bubbles before and we are certainly not there… yet. P/E ratios for most of the market remain relatively normal given the strength of the economy. The highest growth tech companies alone exhibit extraordinarily high P/E levels but their earnings growth seems to justify them. The AI land grab is in full force.
As always, there are many unforeseeable risks which can easily alter the outlook. We remain cautious and vigilant. Please remember that because these quarterly thumbnail sketches are very brief, so do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.
Very Best Regards,
Joseph L. Toronto, CFA
Affiliated Investment Advisors 