When the consensus opinion on the economic outlook changes, the financial markets respond.  The third quarter’s decline in stocks (down 7% from the July highs) coincided with the consensus view shifting to more rapid growth with no interest rate cuts in sight, versus the previous expectations of a slowdown which would result in rate cuts.  The benchmark ten-year US Treasury is now at 4.7% up from the April low of 3.28% in response to this changing consensus.  The higher interest rates provide more competition for stocks, putting downward pressure on the valuation of the market.  Stocks are still up 13.1% for the first nine months but have declined -3.3% in the third quarter.  The intermediate bond index was down 0.83% in the quarter and has returned 0.65% year-to-date.  Inflation looks to remain elevated due to the tight labor market, and we are hearing more about “stagflation” now occurring in Europe.  (Bob and Scott discuss those topics in separate pieces in this Outlook.) 

In the fourth quarter, we should find out how responsive the consumer is to higher interest rates.  Some of us older folks think interest rates are now back to normal, but the younger population have never seen them this high. If consumers rein in spending, then expectations both for inflation and growth could change and stock prices could respond positively.  Being eternal optimists, we think there is a slight ray of hope a new leader might emerge in next year’s election who could tame the Federal deficits.  The geo-political scene has the potential for many surprises.  Perhaps the failed policies of Putin and Xi Jinping result in one or both being replaced.  Whatever happens, owning stocks in a diversified portfolio of strong companies, which make products people need and keep buying, is the best way to protect your wealth from inflation.  Also, having a portion of your wealth in safe, short-term bonds is the best way to sleep at night during volatile markets.