The US Markets had a slight pullback in the final week of the month, but finished October overall with solid gains. The highlights of the month were once again centered on politics and the Federal Reserve.
The global economy collectively breathed another sigh of relief on October 16th. With less than 24 hours before the U.S. Treasury would have run out of borrowing room, Republicans and Democrats struck a deal that ended the 16-day government shutdown. The legislated debt ceiling was also raised as part of the agreement, averting a potentially catastrophic default by the U.S. government.
The outcome was largely expected as it follows in a long line of 11th hour deals in the last few years. Unfortunately (though, not surprisingly), this deal does not outright remove the specter of political uncertainty. The can has just been kicked down the road, again. The new continuing resolution only funds government operations through January 15th, while the debt ceiling was only raised through February 7th. In addition, part of the deal included an agreement that both parties would form a bipartisan committee to address fiscal issues before December 15th. In other words, politicians are likely to again be mired in similar negotiations over several months beginning in just a few weeks. Hopefully, these debates will be less divisive than in the past – though if recent history is any guide, this is unlikely.
For the Federal Reserve, the impact of political gridlock further weighs on a macroeconomic landscape that is already subpar. Inflationary pressures remain extremely muted and, most crucially, the pace of job growth continues to disappoint. On a 3-month moving average basis, net payroll growth weakened to 143,000 in September from 223,000 just seven months prior, which was when tapering talk first started. The unemployment rate has continued to fall lower, but mainly because discouraged workers continue to leave the labor force. The labor force participation rate has now fallen to its lowest level since 1978.
The weak data was likely the main reason for the Federal Reserve electing not to taper its Quantitative Easing (QE) program earlier in the fall, although political risk also likely played a role. As the acceleration in U.S. economic growth has been further delayed, there continues to be little reason for the central bank to lift its foot off the accelerator in the very near term. The latest FOMC statement released on October 30th reiterated that the economic recovery was improving, but that unemployment remains elevated and inflation persistently below target. The biggest change to the communiqué was an acknowledgement that the housing sector has “slowed somewhat in recent months”.
Some forecasters continue to anticipate the taper to begin at the Fed’s December meeting. However, given the continued weakness in the data, the odds of the Fed scaling back QE this year are likely low. We continue to anticipate that the Fed will stay the course on QE until well into next year.
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John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals. For more information, visit https://www.chladekwealth.com.