Waiting for Godot

We’re seeing broad-based gains across asset classes this morning. Stocks opened modestly higher (S&P 500 +.1%). Bonds are in rally mode due to lower inflation and interest rate expectations. Commodities are also rising across the board.

Data from the Bureau of Economic Analysis (BEA) shows consumer incomes are growing faster than expected even as spending slows. Compared with a year ago, incomes are up 4.4% whereas the report’s gauge of core price inflation is up 2.8%. Wage growth continues to outpace inflation, meaning that wages are rising in “real” terms. This can cover a lot of sins , such as rising credit card balances, and also helps offset the fact that prices for many services that consumers use every day are still significantly higher than before the pandemic. Make no mistake, the US consumer is in good shape.

Speaking of good shape, Wall Street forecasts for US economic growth are spiking. Not only has the no-recession view become consensus, but now we find that economists aren’t even sure whether we’ll see a slowdown this year. In early January, a Bloomberg survey showed an average GDP growth forecast around 1.5%. Now that figure is 2.0%. The Atlanta Federal Reserve Bank says first quarter GDP growth is tracking to nearly 3%.

In addition, recent data show improving business activity and corporate profit margins. Wall Street’s consensus forecast for earnings-per-share among S&P 500 companies continues to edge higher. Whereas last year earnings contracted, this year we expect 11-12% growth. That has clearly translated into higher stock prices.

Given the fact that most investors expected the economy to slow significantly at the turn of the calendar year, this data comes as a surprise. We keep waiting for cumulative effects of Federal Reserve rate hikes to show up in the form of negative data, but it just isn’t happening. Meanwhile, stocks are moving higher.