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October 7, 2023 Market Update

The U.S. stock market rebounded for the week through Friday, October 6th.  The S&P 500 Index’s fractional 0.5% increase marks the first weekly advance since the end of August.  Equities are still trading near a four-month low, but for year so far the market is still posting a solid 12.2% increase.

Despite the upbeat year-to-date performance for stocks, investors have recently turned cautious as hopes fade for an economic soft landing amid a renewed surge in borrowing costs.  The 10-year Treasury yield, for instance, rose for a fifth week, ending Friday’s session at 4.78%, just slightly below the 16-year high reached on Tuesday.  

Fueling expectations for even higher yields ahead: Friday’s surprisingly strong payrolls data from the Labor Department.  The 336,000 increase in hiring last month was far above economists’ expectations and suggests that the Federal Reserve will continue to raise interest rates.

Treasury Secretary Janet Yellen said Tuesday that it wasn’t clear how long these elevated yields will remain.  “It’s a great question, and it’s one that’s very much on my and the administration’s minds,” she said.

Publicly held debt of the U.S. has doubled to around $26 trillion over the past eight years, making a sustained rise in Treasury yields very costly for the U.S. government.  At the same time the massive amount of new bonds America needs to issue to finance the government’s budget is on the verge of surpassing investor demand, which adds fuel for higher rates.  

The potential for a political solution to the problem took a serious blow this past week when all 212 Democratic members of the House of Representatives joined with 8 members of the Republican Party to oust Kevin McCarthy as House Leader, thereby increasing the risk of a federal government shutdown on November 17th.

The bickering and uncertainty have contributed to the stock market’s recent struggles.  What these developments mean for equities in the short run is unclear.  After a year of relative calm, I would not be surprised to see increased volatility on Wall Street in the fourth quarter of the year.  

Gratefully, the news is not all bad, as consumer spending has remained strong due to a tight job market and higher wages.  Accordingly, a sudden and sharp decline in stock prices could create a buying opportunity for brave, long-term investors.

That’s all for now.  Have a great weekend, and invest wisely my friends.