Hello, my name is Remy Jacobson. I am Vice President of Jacobson Wealth Management. Welcome to Markets, In a Nutshell. A commentary of October's economy, markets, and current events. In this edition of my monthly market update, we delve into the critical economic indicators that we've been tracking and provide some potential economic implications of the Israel-Palestine conflict. Your insights and constructive feedback are not only welcome but highly valued.
- Inflation: The Consumer Price Index (CPI) ascended further in September, positioning itself considerably above the Federal Reserve's optimal target rates.
- Federal Reserve’s Stance: Jerome Powell stated the central bank remains unwavering in its commitment to taper inflation back to their 2% average target. With two remaining meetings in 2023, the prospect of higher rates is on the table. That being said, the market is deeming it very unlikely.
- GDP Anomalies: United States 3rd quarter GDP surged 4.9% year-over-year, signaling a seemingly prosperous economic environment. However, this prosperity appears paradoxical to the sentiment of consumers.
- Middle East Turmoil: The volatility and potential for escalation in the Israel-Palestine conflict surpasses that of the Russia-Ukraine situation. In the case of such, we could see higher energy prices and thus, a surge of inflation.
September's CPI data presented a 0.4% monthly increase and a 3.7% annual surge. The core CPI, stripping away the volatility of food and energy prices, mirrors this trend at 0.3% monthly and 4.1% annually – all aligning well above the Federal Reserve's comfort zone.
The Federal Reserve
With just two Federal Open Market Committee (FOMC) meetings left in the year, the Federal Reserve is at a critical juncture. The upcoming FOMC meeting results will be released November 1st at 11am PST. Given the recent rapid ascent of the 10-year treasury yield, the Federal Reserve will most likely hold off on raising rates further at this meeting. They are more likely to adopt a wait-and-see approach, gauging the impact of the long-term treasury rate increases on the broader economy before committing to further short-term rate adjustments.
For an explanation of the rising Treasury yields, please refer to August Markets, in a Nutshell.
The juxtaposition of having red-hot 4.9% GDP growth against a backdrop of a cooling labor market, increasing bankruptcy filings, and tightening consumer budgets paints a complex economic landscape. The cause of this is the ongoing arm wrestle between monetary policy (set by the Federal Reserve) and fiscal policy (set by Congress). We have seen a rapid rise of interest rates alongside extremely high government spending levels. These counter acting policy stances are intended to slow inflation while propping up the economy. It is unclear which policy will overpower the other in the long-run; however, in the short-run, it has been kicking the can of recession down the road.
The Israel-Palestine conflict holds profound implications, not just on the geopolitical stage, but also for the global economy – particularly given the Middle East's substantial contribution to the world’s oil supply. The magnitude of war in the Middle East will proportionally impact the price of oil, which is perhaps the single largest contributor to short-term global inflation. In this section, devoid of personal opinions on the conflict and based on my non-expert analysis, I aim to shed light on the potential economic impacts, particularly on energy prices, in the event of an escalation.
- Israel-Iran Confrontation (least likely): An outright war between Israel and Iran remains a low-probability event, but its implications could be seismic. Bloomberg’s Chief Emerging Markets Economist, Ziad Daoud, has stated that such a conflict could propel oil prices to an unprecedented $150/barrel. At these prices, Daoud estimates global inflation could increase to 6.7% in 2024. For context, current oil prices are fluctuating between $80-88/barrel.
- Proxy fighters engage: Hezbollah, the Houthis, and other Iranian backed militant groups, introduce a veil of uncertainty. While Hezbollah has engaged to a minimal degree, they have not declared war on Israel as of the time of writing. If alternate militant forces begin to involve themselves more deeply in the conflict, it is unclear how the United States would respond. Daoud estimates that in this scenario, oil prices could potentially rise to $95/barrel.
- Contained Conflict: A confined conflict scenario involving only Israel and Palestine may have similar impacts to the 2014 war in Gaza. That is, high human casualties but limited economic or market impact abroad.
The S&P 500 has largely ignored the implications of the conflict overseas, albeit with a 2% dip for the month. This downturn marks the third consecutive month of negative returns, resulting in an almost 9% drop from its peak on July 31st.
The world seems to be in a constant state of flux with pandemics, wars, social unrest, and natural disasters perpetually on the horizon. It’s crucial to maintain a grounded perspective and navigate through these tumultuous times with prudence. Wars, undoubtedly, have the potential to reshape our global landscape dramatically. However, with the limited information at our disposal, making radical shifts in investment strategies may not be the most prudent course of action. Instead, fortifying our portfolios through added diversification and continual dollar cost averaging is typically the best course of action.
I hope you enjoyed this update and wish you a wonderful day.
Statements of future expectations are based on current market conditions, and involve uncertainties that could cause actual results to substantially differ from those expressed. This commentary is for informational purposes only and should not be construed as specific advice.