Do it for the economy’s sake

Stocks had a mixed close yesterday because… well, because things are better than traders thought with the economy. With NVIDIA’s earnings out of the way, traders turned their focus to the OTHER important economic numbers in today’s PCE inflation number and next week’s monthly jobs data.

Do it for the plot. I am so sorry to have to do this to you… again. And, on a Friday. One can’t ignore the recent underlying sense of optimism in the market. I know that the Fed has made its case for rate cuts soon, and that is clearly a major lubricant for recent upward movements, but that can’t be all of it. Well, we are pretty much all the way through with Q2 earnings season and that was not too bad. Let’s call it good, at least from my perspective. Side note on that: as a long-term investor, you have to learn how to deal with the reality that even the best names in your portfolio can’t possibly grow their earnings exponentially, forever… and ever; you have to accept solid, quality growth with continued positive prospects for future revenues. So, if you are with me on that, earnings season was pretty good, for the most part. Well, then, what’s left?

The Economy, of course. I have seen my fair share of blue-chip economists’ doom notes recently, only to hear them reverse their calls within a few weeks. Actually, a large group of those blue-chip economists (as compiled by my friends at Bloomberg) on median, put the chances of a recession within the next year at 30%. Ok, I would call that possible but not probable. That number has been pegged there since April of this year, and I would like to remind you that those same economists had that number at 60% a year ago. So, it is fair to say that economists are cautiously OK with the US economy, and the Fed’s letting up on the brakes will certainly help at some point.

Still, we cannot ignore the fact that unemployment has been creeping up. So much so that some recently unearthed, arcane, statistical predictor called the Sahm Rule was triggered, indicating that a recession was on the horizon. I might have gone with it if Claudia Sahm, the rule’s namesake, didn’t come out with a statement saying something like, “maybe not this time.” Well, so much for calling it a rule. All jesting aside, rising unemployment is not something to be ignored. The prospect of losing a job is a sure way to lower consumer confidence, and low confidence leads to less consumption, which ultimately leads to lower GDP.

So, is that happening? Well, not according to the latest consumer sentiment numbers. Earlier this month, University of Michigan Sentiment showed that confidence ticked up recently, while earlier this week, the Conference Board’s Consumer Confidence Index gained ground as well. Despite an uptick in unemployment, consumers are still confident. But can we trust that confidence will translate into consumption, which makes up 2/3 of GDP?

Well, at this stage, we are still looking at revised numbers from last quarter’s GDP, but there is still much to learn from it. Remember that the Fed was still angrily threatening us last quarter, AND unemployment, though lower, was already climbing. Despite that, the latest revision of GDP, out yesterday, reflected an upward revision to +3% from +2.8%, catching economists on their heels. They seem to be on their heels quite often, wouldn’t you say? Digging into that number, we learn that the biggest contributor of that upward revision was… drumroll please… CONSUMPTION. Consumers, you and I, keep buying things! Consumers are literally keeping GDP on the climb. So, can we just close up shop and say that everything is great? Unfortunately, not so fast. If we dig further into the release, we see that the Personal Savings Rate was revised down to 3.3%, which is down from 3.8% in the Q1. That means, consumers are saving less, spending their savings at an increased rate, and opting for Carpe Diem, YOLO, or DIFTP, depending on your generation 💸💸💸, and we all know that that approach is not sustainable. By all means, spend, but please, spend wisely.

YESTERDAY’S MARKETS

NEXT UP

• Personal Income (July) is expected to have increased by +0.2%, same as in June.
• Personal Spending (July) may have increased by +0.5%, an increase from June’s +0.3% gain.
• PCE Deflator / Price Index (July) is expected to come in at +2.5%, unchanged from June. This can drive the markets today.
• Next week, we will get ISM Manufacturing, ISM Services, JOLTS Job Openings, Factory Orders, Durable Goods Orders, Beige Book, and the market mover monthly payroll report. You don’t want to miss any of it, so check back in on Monday for calendars and details.