Consumer spending has defied Wall Street expectations all year, both keeping stock prices near record levels and preventing the U.S. economy from sliding into recession.
That’s why sentiment around stocks next week could hinge on two related economic data points: the August Consumer Price Index (CPI), due out Wednesday, and monthly U.S. retail sales, due a day later.
“They’re lasting a lot longer than any of us would have believed last year,” said Jason Blackwell, chief investment strategist at The Colony Group, of consumers’ willingness to spend despite credit card interest rates exceeding 20% and inflation still above the Fed’s annual target of 2%.
“We believe that consumers remain reasonably healthy and can keep up with price increases,” he says.
The annual CPI rose to 3.2% last month, but has fallen from a peak of 9.1% last year. Blackwell will watch Wednesday’s economic update for signs of easing in shelter-in-place “sticky” inflation, which was set at 7.7% annually in July even as home prices have fallen over the past year. “There is a gap that has to close at some point,” he said.
The sharp increase in mortgage rates has been less damaging to the housing market than in an earlier era. That’s because most homeowners have already refinanced at historically low pandemic rates, which provided a cushion when the Fed raised policy rates to a 22-year high.
A decade of underconstruction has also kept prices from falling even as sales fell, leaving many people with a lot of equity in their homes. At the same time, wages have risen and the economy has refused to capitulate.
Taken together, this suggests there is a recipe for continued spending, especially with household debt levels still near 20-year lows of around 100%, according to Mizuho Securities.
Household debt levels are near 20-year lows, which translates into the resilience of consumer spending.
Mizuho Securities, Federal Reserve Board, Bureau of Economic Analysis
“The market expected a recession last year and was wrong,” said Michael Rosen, chief investment officer at Angeles Investments. “In a sense, they’re probably still looking for a recession. I think that’s wrong too.”
That’s because Rosen sees today’s higher interest rates as less ominous than others might think, especially as wage increases and strong household balance sheets can keep the economy afloat even as spending has largely depleted pandemic savings.
“There is some weakness in the manufacturing sector, but it is the consumer who dominates our economy,” Rosen said. That’s reflected in recent economic data, but also in gridlocked airports, in restaurants or at one of Beyoncé or Taylor Swift’s sold-out summer concerts, he said.
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In July, sales at US retailers reflected the largest increase in six months. Higher energy prices could play a role in the looming economic data for August. But Rosen still sees conditions for equities and short-term government bonds as favorable.
“The market is climbing a wall of worry and that’s exactly what’s happening here,” he said, adding that he expects stocks to rise. “What drives the markets are profits and corporate profits are strong.”
FactSet senior earnings analyst John Butters said Friday that he forecast a third-quarter net profit margin for the S&P 500 index of 11.7%, which would be higher than the previous quarter’s 11.6% figure and above the five-year average of 11.4%. .
“Investors tend to have short memories,” Rosen said, pointing to Fed interest rates that reached double digits in the 1980s. but remained high as the economy grew for most of the decade. “Five percent is a pretty normal interest rate,” he said. “I would go even further and say that zero interest rates are harmful to the economy.”
U.S. stocks ended the week lower, with the S&P 500 index SPX down 1.3% this week, the Dow Jones Industrial Average DJIA down 0.8% and the Nasdaq Composite Index COMP down 1.9% this week, according to Dow Jones Market Data.
A bigger picture: The Dow Jones closed Friday just 6% away from its January 2022 record high, while the S&P 500 was 7% below its previous peak. The yields on 3-month BX:TMUBMUSD03M and 6-month BX:TMUBMUSD06M government bonds have been above 5% since this spring.