Consumer Spending and Corporate Profits
While the market will have to wait a few more weeks to get clarity on what the makeup of Congress will look like, we can give you an update on two important components of what drives stock prices and the economy. First, let’s take a look at an update on consumer spending. You will see on a chart in the video for this episode that the consumer continues to be a bright spot even with higher inflation and the Fed’s intent on slowing down demand with higher interest rates. Second, we are almost at the conclusion of third quarter earnings season, which has been mostly positive. On another chart shown in this episode, you will see that corporate profits continue to climb higher, which is a great sign for the market. The combination of strong consumer spending and corporate profits continues to be a positive for markets going into year-end. A third positive point we want to make is that after the strength seen in the market in recent weeks, 56% of stocks are above their 200-day moving average. This is higher than the previous high from back in August. We look at this from a momentum standpoint which should be a positive development for stocks. The consumer is strong, corporate America is strong, and the average stock has positive momentum. All of these things are helping the market fight off what has been an aggressive Fed raising rates.
After the release of the inflation report on Thursday of last week, there was an unbelievable jump in the market, which ended up being the highest market bounce in two years. We can’t yet be sure if this was a bear market bounce or the start of a new bull market but what is clear is that the market took the inflation report very positively. We’re not at the point of deflation yet however, the worst of it should be behind us. As you can see in the chart shown in this episode, inflation is still increasing but at a much slower pace. Core CPI, which is inflation minus energy and food prices, only rose 0.3% month-over-month and is up 6.3% year-over-year. That’s something that the Federal Reserve looks at when they make a determination about rates. Right after the Fed spoke at the beginning of the month, there was a 50/50 chance that they would do a 50 or 75-basis point hike in December. After this report was released, those odds flipped to an 80% chance of only a 50-basis point hike, which is good news. The bond market took that in stride as prices rallied and yields came down. A lot of things that impact the consumer, such as inflation and the Federal Reserve slowing down the increase of interest rates, could be another catalyst for this market.
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