Third Quarter 2023 Market Commentary
Stocks and bonds were both impacted by a combination of events during the third quarter, starting with an increase in oil prices, which caused inflation to re-accelerate in August. The rebound in inflation contributed to a sharp rise in interest rates, with the 10-year Treasury yield rising from 3.82% at the beginning of the quarter to 4.57% at quarter end. The rise in interest rates put pressure on the stock market, and the S&P 500 declined 3.2% during the third quarter.
Rising Oil Prices Renew Inflation Fears
After trading lower during the past year, oil prices rose to a 12-month high during the third quarter. Oil rose above $90 per barrel in September, from approximately $70 per barrel at the end of June. Demand for oil remains strong as the global economy continues to grow, while OPEC recently announced extended production cuts through the end of 2023. Additionally, the US’s Strategic Petroleum Reserve sits at its lowest level since the 1980s, which leaves little capacity to mitigate a potential supply disruption. With OPEC’s production cuts squeezing global supply, oil prices surged nearly 30% in the third quarter.
The rise in oil prices caused inflation to re-accelerate in August, with gasoline prices accounting for over half of the monthly increase. Oil’s use as a transportation fuel means that it impacts nearly every segment of the economy, and a continued rise in oil prices could keep upward pressure on inflation as rising fuel costs are passed through to the consumer. Indeed, the CPI for August 2023 of 3.7% was higher than the 3.0% reading in June 2023. Overall, inflation has fallen from the 9.1% reached in July 2022 to under 4% but getting below 3% (where the Fed has maintained as its goal) may prove to be difficult with higher oil & housing prices, and the continued strength in the labor market.
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