Rising Rates and Housing Dilemmas: A Quarter in Review

Also, a look at U.S.-China Relations

• The stock market is rebounding after recent losses, but a potential quarterly dip looms on the horizon.
• Rising interest rates create a housing market dilemma for homeowners while potentially slowing inflation.
• Improving U.S.-China relations offer hope for economic growth as a potential summit fosters confidence.

The past quarter has been a rollercoaster ride for investors, with markets experiencing both ups and downs. In this blog post, we'll delve into the key events and trends that shaped the economic landscape during Q3 2023, offering insights that can help you navigate these uncertain times. Let's explore the three takeaways in more detail.

The S&P 500 and Nasdaq Composite managed to break free from their two-day losing streaks, ending the quarter on a positive note. The S&P 500 saw a 0.6% gain, while the Nasdaq Composite performed even better with a 0.8% increase. This marked a welcome turnaround following weeks of market turbulence. However, despite this brief resurgence, it's crucial to note that stocks appear to be heading for their first quarterly loss of the year. As of the quarter's end, the S&P had dipped by 3.5%, while the Nasdaq had fallen by 4%.

What's causing this volatility? A combination of factors has played a role, including soaring interest rates and surging oil prices. Crude oil, trading at over $90 per barrel, has caused concerns among investors. Additionally, a strike by United Auto Workers has shown no signs of resolution, potentially driving up car prices further. The threat of a government shutdown also looms large if lawmakers fail to reach an agreement. Despite these challenges, there are also glimmers of hope on the horizon.

The surge in interest rates during the quarter has had far-reaching consequences, particularly in the housing market. Rates on 30-year bonds hit an intraday high of 4.74% before settling at 4.65%. The benchmark 10-year bond briefly touched 4.67% before closing at 4.56%. These rate increases have translated into a significant impact on the housing market. Pending Home Sales for August, anticipated to decline by a modest 0.8%, plummeted a staggering 7.1%.

Homeowners now face a challenging dilemma. Many are locked into mortgages at or near 3%, making the prospect of moving an expensive one due to substantially higher financing rates. According to Freddie Mac, the average 30-year mortgage rate now stands at 7.31%, the highest since December 2000.

Amid the economic uncertainties of the quarter, there is a ray of hope in the form of improving U.S.-China relations. High-level talks between the Biden Administration and top Chinese officials are underway, with discussions regarding a summit between President Biden and President Xi on the table. The frosty relations between the two economic giants have been a source of economic and geopolitical concern. A thaw in these relations could provide much-needed confidence for U.S. companies that rely on China for manufacturing and sales.

In addition—despite concerns of an impending recession—the U.S. economy continues to grow. The final reading on GDP for Q2 revealed a gain of 2.1%, signaling resilience in the face of challenges. Inflation is also showing signs of stabilization, with the most recent report on personal consumption expenditures (PCE) indicating a 0.1% increase on a month-over-month basis, slightly below expectations. Year-over-year, there was an increase of 3.9%, aligning with forecasts.

As we look ahead, market volatility has settled down from its recent highs, suggesting investors may be feeling more optimistic about the future. The VIX, which hit an intraday high of 19.71, has since declined and now rests comfortably below 17. These indicators can provide some reassurance as we move into the next quarter.

In conclusion, the third quarter of 2023 has been marked by economic challenges and uncertainties but also by signs of resilience and hope. Navigating these volatile markets requires a keen understanding of the factors at play and a long-term perspective. As always, staying informed and sticking to your investment plans and objectives will be key to successfully weathering these fluctuations in the economic landscape.

JJ Kinahan is CEO of IG North America—which includes tastylive, tastytrade and IG's FX Business. Kinahan traded for 21 years at the Chicago Board Options Exchange. He serves on the CBOE Advisory Board and the SIFMA Options Committee. @thejjkinahan 

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