October 4th 2023, 3:05:23 pm
(about 2 months ago)
North American stocks dropped in September as the possibility of the US government shutdown was added to the concerns of high-interest rates being the new normal. S&P 500 and Nasdaq dropped 4.87% and 5.81% respectively while Canada’s main benchmark lost 3.7% in September.
The inflation data, energy prices, the officials’ remarks, and the overall sentiment are denting the year-to-date gains of equities. Oil prices surging again with West Texas Intermediate oil prices passing $90 a barrel. The forecasts show that oil prices in 2024 are expected to be over $100 a barrel, the level at which North American inflation is challenging to imagine going back to the 2% target.
The latest inflation report showed both US and Canadian inflation numbers higher than last month and expectations. The central bank officials were quick to underline that they may not raise the rates further, but markets should expect to see interest rates of over 5% for an extended period. The forward guidance of the central banks also shows that rates will most likely stay elevated.
The stock markets so far have been supported by strong earnings reports and the notion that inflation will be curbed and rates will come off at some point. With the third quarter earnings upon us and less optimism regarding the rates, investors may actually start to consider lower multiples in their stock valuations, considering the markets are expensive currently.
This quarter’s earnings and the next inflation print are crucial to determine the direction of the markets for the rest of 2023.