Investors’ Message to the Fed: Be Patient

Major stock market averages opened lower today, but have clawed back into the green. The Dow is up 160 points today (and a rather stunning 4,460 points so far this quarter). The S&P 500 is up .4% today and 7.1% for the quarter. Commodities surged ahead this morning—gold +.5%; oil +2.9%; copper +1.1%—on dollar weakness. Bonds are trading broadly lower. Long-term Treasuries are down about 1.2% and intermediate investment grade corporates are down about .3%.

Over the last two days we’ve had a slew of economic data to parse. I’ll briefly summarize.

Yesterday we learned that US third quarter economic growth was significantly stronger than the Bureau of Economic Analysis (BEA) initially reported. So-called “gross domestic product” grew 3.2% (compared with the prior quarter, annualized) vs. the prior report’s 2.9%. Apparently, both consumer and business spending were upwardly revised. What’s more, the Atlanta Fed says GDP growth is tracking to 2.7% for the fourth quarter. These figures are far too strong for the Fed’s comfort. After all, its main policy goal is to restrict growth in order to bring down inflation.

On the other hand, today’s Personal Income & Spending report suggests consumer spending slowed sharply last month, barely keeping up with inflation. And this comes despite better than expected income growth. Spending on autos and merchandise sank, while restaurants & hotels fared better. Consumers are clearly a bit more cautious, having spent down about half of the savings accumulated during the pandemic.

Of course, inflation is slowing, but perhaps not fast as the Fed would like. The Fed’s preferred gauge of core inflation (“Core PCE Price Index”) edged down to an annual rate of 4.7% from 5.0% in the prior month. Economists were expecting a larger decline. Fed officials say they’re targeting 2% inflation, but surveys of economists and consumers don’t see that coming anytime soon.

By definition, most of the economic indicators we track are backward looking. The US Index of Leading Economic Indicators (LEI) is an exception in that its goal is to predict the economy’s trajectory for the near future. LEI fell 1% from October to November, and is down 4.5% from a year ago. So despite the GDP figures listed above, it does seem the economy is losing steam.

The bottom line is that while the economy has proven surprisingly resilient this year, Fed policy is working to guide growth & inflation lower. Most investors believe the Fed has probably done enough for now and needs to be patient.