The Cambridge Weekly – 2nd October 2023

The Cambridge Weekly – 2nd October 2023

Economic resilience is about to be tested

Historically September has on average not been great for investors, and as it turns out this year is no exception to that norm. Both equities and bond valuations have declined and even though equities have not materially moved up or down when looking across the past four months, there is increasing sentiment that the 2023 market recovery is running out of steam or may even be turning.

This may seem somewhat surprising to some investors when we observe that the rate of inflation (until recently, the main market headwind) has been steadily declining. Indeed, this has been happening in many areas, more than many economists had thought possible. Meanwhile, economic growth and corporate earnings have proven far more resilient in the face of the hugely increased cost of finance and consumers being battered by the cost of living crisis.

US avoids another shutdown

For investors, concerns about US finances are always really fears about politics. Shutdowns and debt scares are regular occurrences in the world’s largest economy, but capital markets do not generally move too much in response. The US Treasury came worryingly close to technical default in May – again due to political brinkmanship, then about the technicality of the debt ceiling – but equities were fairly stable at the time. Default, even purely technical, would have been much worse for the functioning of the global financial system.

That this was a threat even when the nation so clearly has the means to service debts (in virtue of issuing in its own currency) is symptomatic of a larger problem that fraught US politics poses to its economy. Extended shutdowns in the past – most famously in 2011 – have led to measurable drags on US growth. Federal employees going without their wages is good for no one.