The consumer is spending, and the economy continues to expand. The economy heavily relies on consumer activity, constituting approximately 65% of its driving force. Consumer spending has remained robust, bolstered by strong confidence levels. Currently, all attention is focused on the latest Personal Consumption Expenditures (PCE) data, which recorded a 0.3% increase. Wall Street recently faced a challenging session, witnessing both the S&P 500 and Nasdaq Composite endure losses exceeding 1% on Thursday. Notably, the Nasdaq Composite found itself sinking deeper into correction territory, while the Dow Jones tumbled by more than 250 points. Despite a September uptick in inflation, consumer spending surpassed expectations, as reported by the Commerce Department on Friday.
The economy exhibits strength, exemplified by the higher-than-expected GDP and PCE figures. The Federal Reserve (FED) is poised to maintain its “higher for longer” stance on interest rates. Anticipations suggest at least one more rate hike, if not more, though it’s important to note that interest rates operate with a lag. The FED will exercise patience as it monitors whether the economy begins to slow further.
The core Personal Consumption Expenditures Price Index, an important inflation metric utilized by the Federal Reserve, registered a 0.3% increase for the month. Even in the face of rising prices, personal spending exhibited resilience, surging by 0.7%, surpassing the anticipated 0.5% increase. Personal income also grew by 0.3%, falling just one-tenth of a percentage point short of estimates.
Key factors currently influencing the economic landscape include:
- Economic Data Releases: The Bureau of Economic Analysis has unveiled third-quarter GDP figures that exceeded expectations. However, concerns linger about a potential slowdown in the fourth quarter. Despite worries about inflation, there are indications that it may be moderating, while the overall strength of the economy remains notable.
- Corporate Earnings: Today, several companies are set to disclose their earnings. Positive earnings reports could boost stock prices, whereas disappointing reports may lead to sell-offs. Notably, the current earnings season has generally met expectations.
- Interest Rates: The Federal Reserve is expected to maintain elevated interest rates for an extended period, potentially continuing to raise rates as part of its strategy to combat inflation.
- Geopolitical Tensions: Ongoing conflicts such as the Ukraine war and tensions between the United States and China continue to exert sustained pressure on the global economy, potentially resulting in market volatility. Escalating tensions in the Middle East, exemplified by U.S. airstrikes targeting Iran-affiliated locations in Syria, further contribute to geopolitical uncertainties.
Key points:
- Consumer Activity: Consumer activity plays a significant role in the economy, accounting for about 65% of its driving force. Consumer spending remains strong, supported by high confidence levels. Personal Consumption Expenditures (PCE) data, which recorded a 0.3% increase.
- Inflation and Consumer Spending: Despite a September uptick in inflation, consumer spending exceeded expectations, reflecting the economy’s resilience. The economy shows strength, as indicated by better-than-expected GDP and PCE figures.
- Federal Reserve and Interest Rates: The Federal Reserve (FED) is expected to maintain higher interest rates for an extended period and may continue to raise rates as part of its strategy to combat inflation. There is a sense of caution, given that interest rates operate with a lag.
- Geopolitical Tensions: Ongoing conflicts, such as the Ukraine war and U.S.-China tensions, continue to exert pressure on the global economy, potentially leading to market volatility. Escalating tensions in the Middle East, including U.S. airstrikes in Syria, add to geopolitical uncertainties.
The US economy remains the world’s strongest and a safe haven for investments, irrespective of global conflicts. Most indicators and interest rates are lagging, a factor that the market has already accounted for. Nevertheless, anticipated market volatility will persist in the near term due to ongoing economic challenges, global geopolitical tensions, and developments in Washington concerning the debt issue. Our focus remains on the long term and identifying value stocks. Investors should maintain vigilance and prioritize effective risk management.