It’s been quite a journey for the US economy over the past several years, from pandemic supply chain upheaval to the Federal Reserve’s battle against inflation. Consumers have kept spending, and the job market has proven perpetually robust, with predictions of recession regularly falling flat. Here are a few data points to ponder the direction of the stock market for the rest of the year.

  • US companies added fewer jobs than forecast in October, suggesting demand for workers in what’s been a historically strong American labor market may be starting to wane. And while the labor market has slowed, it’s still enough to support strong consumer spending.

  • A cooling US job market gives the Federal Reserve Chair and his colleagues room to keep interest rates on hold in December and reinforces market views that the central bank is done with rate hikes

  • But, US Federal Reserve Chair Jerome Powell said the central bank will continue to move carefully but won’t hesitate to tighten policy further to finish off inflation. And, a few at the Fed opined that the US economy still hasn’t felt the full effect of past interest-rate increases, suggesting more slowing is yet to come.

  • Bonds continue to underperform as yields rise. The latest Treasury auction earlier this week was a disaster with not enough buyers suggesting investors are expecting higher yields from continued rise in interest rates.

Where do all of these conflicting data points leave us?

Future Wealth’s View

In hindsight, so many economists could not have been more wrong in 2020 about the path of inflation. Economists ignored data pointing to growing inflationary pressures and wrongly predicted that inflation would be transitory. In 2020, it was hard to imagine that consumers would spend at the rates they ultimately did. Today, consumers seem to continue to spend despite whatever the Fed does to slow the economy.

While the Fed attempts to time its hike or pause to perfection, the importance of consumer spending that makes 70% of the GDP cannot be dismissed over other factors. Consumer spending is ultimately driven by income, savings and prices. Higher inflation has not slowed down the consumer and while the market may react violently to the CPI data one way or the other next week, we are entering the holiday season where discretionary spending will most certainly see an uptick. A recession or a softening of the job market will be the one to keep an eye on for investors.

Absent that, we could have a good end to 2023. Warren Buffett often reminds us that  – “For 240 years it’s been a terrible mistake to bet against America”.