September Market Update: A Steady Economy Beneath the Noise

This has been a noisy stretch, and an unsettled feeling seems to be almost universal in our recent talks with clients. Fuel prices have jumped, serious conflict continues overseas, and the dollar’s value has bounced around, which together have dominated the headlines and made markets bumpy. Let us step back from the day to day and look at what the evidence actually shows, because underneath the noise the picture is steadier, and in a few ways more encouraging, than it feels.

What’s happening now

The economy is still growing. Business surveys slipped only a little last month and still show expansion,¹ and the big technology companies’ current earnings and future guidance is enough to justify their high share prices. Right or wrong, the rush to invest in artificial intelligence is being driven by real demand for computing power, not just hype.

Banks are still lending, and money is moving normally through the economy. One of the clearest indicators to tell a temporary market scare apart from a real economic crisis, and right now it looks like health, not trouble.

The Federal Reserve raised its short-term interest rate again in September to keep pressure on inflation, which makes short-term borrowing a little more expensive.² Behind the scenes, other policymakers are working to keep longer-term borrowing costs in check and money flowing normally through the economy, so the system keeps running smoothly.

There is conflict around the Strait of Hormuz, the narrow sea passage that carries a large share of the world’s oil, and a separate fight between Saudi Arabia and forces in Yemen has added to it. We are not brushing this aside; it has been a genuine source of higher prices and uncertainty. More recently there are early signs the pressure is easing, though it is too soon to call it settled.

Looking ahead

The jump in fuel prices is worth a closer look, because the cause is not what most people assume. Current data do not indicate a significant shortage of crude oil, the raw material. The pinch is in refining, the step that turns crude into the finished fuels people actually buy, like diesel, gasoline, and heating oil. The world’s refining capacity has been stretched thin, and the overseas conflict made it worse, so fuel prices at the pump have jumped, not crude oil itself.³ Energy price spikes tied to conflict have usually faded once the trouble passed, as in 1990, when Iraq’s invasion of Kuwait lifted oil and inflation for a few months before both came back down. We appear to be seeing the early stages of that pattern now, as the conflict cools. Even so, fuel prices could stay higher for a while after crude eases, because refining capacity cannot be rebuilt quickly. So we are watching how long this lasts and are not assuming a quick fix.

A quick word on the dollar, because the terms confuse a lot of people. A stronger dollar means each of your dollars buys a little more, especially imported goods and overseas travel. A weaker dollar means each dollar buys a little less of those things. The same slow loss of value that trims what a dollar buys is also what makes the country’s large debt easier to handle over time. The debt is a fixed pile of dollars, so as the economy grows and prices and incomes gradually rise around it, that fixed pile takes up less and less of the picture. It works a bit like a fixed mortgage payment that feels smaller as your paycheck grows. That is why a slow, gentle easing of the dollar tends to help more than it hurts, and along the way it supports American companies that sell abroad and lifts the price of gold. Over the past year the dollar softened a little, and lately it has firmed back up, which is normal. The one thing we want to see is that any decline stays gradual rather than sudden.

Our best guess is that a growing economy holds up and avoids a downturn. Inflation is still running a little above the level the Federal Reserve aims for,⁴ which is why it raised rates, and much of the recent pressure has been in fuel, which we expect to ease as the energy situation settles. The main things we are watching are how long the fuel squeeze lasts and how the dollar behaves from here, because those are two key elements to how this turns out.

Bottom line

The higher cost of fuel and the conflict overseas have made markets bumpy, and both now show early signs of easing. And the dollar’s gentle, long-term easing looks more like part of a plan than a threat, even though it has firmed up again lately. Most important of all, the two things that separate a passing scare from a real crisis, whether the economy keeps growing and whether banks keep lending, are both pointing the right way.

Our approach at times like this is not to chase headlines, but to stay diversified, keep some protection in place, and adjust as the facts change. We are watching all of it closely, and we are always glad to talk it through.

Sources

1. Institute for Supply Management, Manufacturing PMI.
2. Federal Reserve, interest rate policy announcements.
3. U.S. Energy Information Administration, petroleum and refined-product data.
4. U.S. Bureau of Labor Statistics, Consumer Price Index (inflation).

This article is for educational purposes only and does not constitute tax, legal, or investment advice. It is not intended to reflect a complete client suitability profile and does not account for your specific investment objectives, risk tolerance, time horizon, or financial situation. Past performance does not guarantee future results.