Consumer Spending Could Help The Market Move Forward

Ashley Page photo10/16/12: With Monday’s markets in the rearview mirror, let’s take a “look ahead” at a few items that we will be tracking carefully. These are just a few opinions that we have, and as with life, nothing is certain about them.

  1. First of all, here’s a “week-at-a-glance” view of what’s coming up over the next four market days.

    Leading off yesterday, U.S. retail sales data for September was released along with a report highlighting business inventories for August. Today, the U.S. releases reports on consumer prices and industrial output for September, the National Association of Home Builders issues its housing market index for October, and the second presidential debate occurs. On Wednesday, data on September housing starts are released by the Commerce Department. Thursday has more of an international focus, as China reports third quarter gross domestic product and European Union leaders begin a two-day summit in Brussels. Closer to home, the Labor Department posts initial jobless claims for the latest week. The market week ends Friday with The National Association of Realtors releasing sales of previously owned homes for September.

    What does this mean for investors?

    For the second week in a row, we have a market “tug of war” going on between the negative impact of lackluster corporate earnings and the positive impact of increased consumer spending (more on that below) and an improving real estate market. Which will dominate?

  2. Financial Market Outlook

  3. Consumer spending in the United States is improving.

    This past Friday, The University of Michigan survey showed consumer sentiment hitting its highest level since the recession. The Commerce Department data released yesterday gives us some of the first evidence that this rising confidence is actually translating into spending. Retail and restaurant sales rose a seasonally adjusted 1.1% in September from August. Further, sales figures over the summer were revised upward, representing a consistent, and steady, upward movement since an anemic spring. Retail sales figures can be volatile, especially during periods of rapidly changing energy prices or unstable economic conditions. However, the production of the three month moving average in this case “smooths” this effect and points to a definite upward trend.

    What does this mean for investors?

    Having the consumer “back in the game” would really help markets going forward. U.S. GDP is 70% consumer and 30% manufacturing, so people spending more money is a powerful impact. Our suspicion is that this is going “hand in hand” with a gradually improving housing market, with people feeling “wealthier” as their home values gradually recover.

  4. On the corporate front, uncertainty is clearly slowing capital goods spending.

    U.S. businesses have a knack for doing well in both up and down markets, but uncertainty just kills them. Recent gains in prices for capital equipment, such as industrial machines, are easing as companies invest at a slower pace. The producer-price index for capital equipment was up 1.7% in September from a year earlier, as compared with a 2% gain in August. A sluggish economy and uncertainty about federal spending cuts and tax increases set to take effect in January have made companies cautious.

    What does this mean for investors?

    We simply have to find a way to give American business some clarity, particularly as they are right in the middle of their strategic planning processes for next year. Companies have record cash available to them, both on their balance sheets and what is also accessible through record low borrowing costs. They simply are not deploying that cash for investment at the moment, particularly those industries that supply the Pentagon. One way or the other, businesses in the United States need to be able to see a clear path before them before markets can really benefit.

  5. On the international front, global finance officials are having problems agreeing on the “best way forward” to solve the global financial crisis.

    The IMF meeting in Tokyo this past weekend highlighted differing opinions among the world’s largest economies as how best to solve the global financial crisis. The Europeans are still debating over the damage caused by austerity measures, while the Chinese and Japanese are having a difficult time cooperating because of the recent territorial dispute. On top of all of that, the United States is being blamed by everyone for making the global situation worse with its inability to resolve the current budget mess. During the 2008 financial crisis, IMF and World Bank meetings were a forum for unified action, including coordinating stimulus meetings and bank rescues. No doubt, the tone of the current meetings was far different.

    What does this mean for investors?

    Finding “big steps quickly” to aid the global financial crisis will be more difficult this time around. Simply put, the solutions are getting harder now and, when available, are tougher to implement. As one example, large central bank liquidity injections during the financial crisis have already been done, and the “marginal improvement” on the global economy from similar action today would not be nearly as effective.

Should you have any questions regarding your investments or about the current state of the economy, please call me at (205) 989-3498 or email me here.

Ashley Page
Senior Vice President
Wealth Consultant

Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.

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