After solid performance in both July and August, the S&P 500 was considerably weaker in September. It was more than just passing weakness, however. The stock market looked much less the cocksure prize fighter than the contender who took a shot to the jaw that wobbled his knees.
There are plenty of explanations for the market’s diminished presence. Oil prices have remained stubbornly high. GDP estimates are coming down. Stagflation is a common topic again. The problems with real estate debt in China are metastasizing. Perhaps most importantly, rates are going up again, and because of inflation concerns, not better than expected growth. This witches brew may be entertaining for those caught up in the Halloween spirit, but long-term investors are wondering if this will bring trick or treat.
Much of the concern starts on the energy front where prices from oil to natural gas to coal have all been on the rise. The outstanding question is, “How much should we make of this?”
Robert Armstrong from the FT caught up with Jason Bordoff, the director of Columbia University’s Center on Global Energy Policy, to provide some context on energy prices:
“The only thing that helps the climate is if demand falls with supply. Demand falls because of policy, and because technology drives the costs of the alternatives down, and capital goes into them. Some will say higher [fossil fuel] prices are what causes higher investment in alternatives. But they are going to cause a backlash against the climate policies that we really need.”
“What this [crisis] shows is how difficult, disruptive and messy this transition is going to be. Whoever thought we could replace the lifeblood of the world economy and that would be easy? It’s going to be super volatile.”
The Economist also addressed the policy of decarbonization and its effects on energy markets. It also reached a similar conclusion: “The age of abundance [of energy] is dead.”
At the same time, GDP estimates for the third quarter have been falling precipitously to where the Atlanta Fed’s GDPNow estimate is only 1.3%. Not only is this a striking change from only six months ago, the deterioration in the last month has been substantial. Are higher energy and food prices already constraining other spending?