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GDP and consumer spending pop as markets take a breath
Last week’s economic data showed that the U.S. economy still has plenty of momentum. The standout was a sharp upward revision to second-quarter GDP, now at 3.8%, powered by resilient consumer spending and stronger business investment. August’s numbers reinforced the trend, with inflation-adjusted consumer spending rising 0.4% demonstrating a clear sign that households still feel confident enough to open their wallets.
The economy isn’t without its cracks, though. The housing market still remains in deep recession territory. Existing home sales slipped further, and while new home sales spiked on builder incentives, that momentum isn’t likely to last. The labor market, too, is sending mixed signals. Layoffs remain low, but hiring has essentially stalled, raising concerns about whether consumer strength can endure. Inflation, meanwhile, remains sticky, with the Fed’s core PCE measure steady at 2.9%, keeping pressure on policymakers ahead of their October 30 meeting.
Markets cooled after seven straight weeks of gains, with stocks dipping midweek on Fed caution, rising Treasury yields, and AI bubble jitters. Energy bucked the trend, supported by higher oil prices, while gold reached a new record at $3,791. Housing data, Treasury moves, and political drama around a looming government shutdown all weighed on sentiment (preview of this week). And here’s the kicker…if the shutdown happens, key data releases like next week’s jobs report may not even see the light of day until it blows over.
With that said, the bullish trend hasn’t disappeared. The S&P 500 bounced higher off its 20-day moving average, a textbook move for a market still in an uptrend. Optimism around Q3 earnings and supportive technical indicators are keeping the rally alive, even if turbulence lies ahead. If you don’t like turbulence, don’t fly.
What this means for investors
The economy is still running hot, but inflation and labor softness could worsen in one or both directions. A government shutdown or a weak jobs report would likely spark volatility, but absent those shocks, momentum remains bullish. Stay diversified, be prepared for bumps, and remember in markets, a dip is often just a pit stop. There are a lot of potential paths for the market, so don’t overplay your hand. There are a lot of asset classes working, so don’t bet on just one. Diversification isn’t always this easy, so take advantage of it.
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Economic Reports
From Wednesday (8/1) on, everything is up in the air if we have a government shutdown. This week is all about the labor market, and we’ll get JOLTS regardless, so expect to see more focus on that early in the week since it's the only given.
I guess it wouldn’t be October if we didn’t have some spooky events happening.
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Housing, scams, & the K-shaped economy
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- The pay gap is getting bigger | This isn’t the pay gap that gets most of the press. Despite gains for low-income workers, the pay gap has widened between the highest and lowest earners, which is why the highest earners are currently carrying the economy and spending with abandon.
Gen X needs help
Famously independent, Gen Xers eschew help at their own peril now. Many older Xers got a late start to retirement savings due to the changeover from pensions to 401(k) plans. Mid-career during the 2008 crash set many of them back, and with some scars around investing. Adding to their risk, the potential shortfall on Social Security will hit the same year the oldest Gen Xers will be at full retirement age (age 67 in 2032).
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- Generation X’s money woes take spotlight in new book | Gen X may complain about being forgotten too often, but this is likely only the beginning of the books profiling their uphill battle for retirement and healthcare security. Every single one will probably reference Reality Bites, too.
Chart(s) of the week
The US isn’t the only country with stubbornly high long-term borrowing rates. Europe might be having a moment with its stock market, but its economies aren’t much to write home about, and France just got their credit downgraded.
Via New York Post
I’ve written about this before [Sept. 7th charts in BLS me, Father, for I have sinned], but the volume of money into US markets is unrelenting. Michael Cembalest offers some excellent charts on this fact. In his own words:
If you believe that supply and demand conditions affect the price of goods and labor, there’s every reason to believe such conditions can affect financial asset prices as well. At the end of the day, $1.5 trillion in annual defined benefit and defined contribution payments into qualified plans by households and employers has to end up invested someplace. While such contributions have declined as a share of market cap from their 2009 peak, they’re still running at 3%-4% per year while the supply of US equities continues to shrink (blue series in first chart).
Source: Michael Cembalest, September Eye on the Market
Related: Stocks Rally, Bonds Flinch: Is the Fed’s Rate Cut the Start of Something Bigger?