Consumer Powers Forward

January 18, 2024

There are a lot of adages in investing and one that has gotten a lot of air time in recent years is “don’t bet against the American consumer,” cited by those advocating for ongoing strength in the US economy backed by Americans’ desire (and ability) to spend.

This adage was once again proven true this week with the release to December’s retail sales report. Despite prevailing fears that the consumer would curtail holiday spending in the face of lingering inflation and higher interest rates, consumer sales remained very strong, rising 0.6% from the prior month (twice the anticipated level). On a year-over-year basis, retail sales rose 5.6%, very close to the 5.8% level from a year ago (and well ahead of current inflation levels)

Where were consumers spending? Everywhere seems to be the answer. Holiday spending topped $964.4 billion with the largest increases residing in the top three categories of restaurants/bars, electronics/appliances, and health and professional care.

This retail sales report was significant as investors continue to look for cracks in the economy, caused either by inflation or the Fed’s aggressive interest rate policy. Based on this data, those cracks are not yet apparent, at least not where the consumer is concerned. Even after the pandemic spending boom, it seems Americans are holding it together. This is in large part due to excess savings from the pandemic, as well as ongoing strength in the labor market (as evidenced by this week’s jobless claims number, reaching lowest level since 2022).

This week’s retail sales report is good news for consumers – but may be bad news for markets. Why? This ongoing strength, even in the face of higher interest rates, may dissuade the Federal Reserve from cutting rates anytime soon, or even worse, may require the Fed to raise rates again in the future. We remain of the view that inflation is the dominant (if not sole) focus of the Fed and if consumer demand remains strong, inflated price levels may also remain. This is far from a certainty however, as prices have come down markedly in 2023 (all while consumer spending and GDP growth remained strong)

This push/pull between good news for consumers/bad news for markets is likely to remain for a large part of 2024 and will likely result in a turbulent 2024 for investors. However, we remain confident that markets will continue to advance (just not in a straight line).

Onward we go,

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