Recent U.S. Macroeconomic Data is Positive
Over the past 10 days, the U.S. economy demonstrated positive signs of growth and improvement. In fact, U.S. economic growth accelerated in the third quarter of 2023 with a near 5% (4.9% to be exact) increase in GDP. The growth clocked in at the fastest pace in nearly two years. Economic growth was driven mainly by higher consumer spending propelled by higher wages from a tight labor market, a rebound in residential investment, and business restocking to meet strong demand(1). This growth defied previous recession warnings and showcases the economy's resilience despite aggressive interest rate hikes by the Federal Reserve. However, business investment dipped for the first time in two years, especially in equipment and factory construction related to semiconductor manufacturing. Additionally, a smaller trade deficit and inventory accumulation offered a boost to the economy. The U.S. business output ticked higher in October due to a pickup in new orders which helped the manufacturing sector emerge from a five-month contraction, and services activity accelerated as well(2).
U.S. Consumers Are Resilient ... For Now
Consumer spending, which critically accounts for more than two-thirds of U.S. economic activity, accelerated at a 4.0% rate, significantly contributing 2.69 percentage points to GDP growth(3). Spending on both services and goods was evident, which is a departure from the demand shocks spun into motion by the pandemic. The balance in consumer demand is a refreshing and positive sign for the overall economy. Although personal income growth came in at 0.3% in September compared to an August mark of 0.4%, wage growth is still outpacing inflation which is fueling consumer spending(4). However, there are brewing negative factors that U.S. consumers will have to reckon with in the coming week and months. Many economists are concerned about dwindling excess savings acquired during the pandemic and a mass return to student loan repayments in October. As these forces grow, consumers may reduce spending or worse yet be forced to fund purchasing with debt which comes at higher costs thanks to the new normal higher for longer interest rate environment.
As consumers continue to spend through high interest rates and persistent inflation, the Fed’s next actions are always in the back of investors’ minds. The overall trajectory of all inflation measures is down when compared to their pandemic peaks. While prices for goods are moderating, services pricing which is largely driven by wages remain persistently high(5). Market participants anticipate the Fed to hold rates steady at the next FOMC meeting, yet the threat of additional rate hikes remains.
The Week Ahead is Full of Headlines
Looking ahead, the upcoming week is poised to be significant for financial markets with a few major economic events on the horizon. A Federal Reserve meeting, fresh U.S. employment data, and an earnings report from technology heavyweight Apple are expected to potentially influence the course for stocks and bonds.
Technical Analysis of the S&P 500 Causes Concern
A technical examination of the SPX chart shown in FIGURE 1 demonstrates a concerning picture. SPX price action has clearly broken through the yellow support trendline that has been in play since March 2020. Admittedly, this support line has only been tested twice before being broken in the past week. The Friday October 27th low was roughly 2.7% below support, so further weakness in price action will bring us close to a decisive 3% break which would signal the end of the yellow trendline as support. We have drawn three new purple trendlines which could provide support although all of these lines have only been tested twice. Overall, SPX price action is below its 200 day SMA with only mild, untested support to stall any further downward moves. We think this chart shows the vulnerability of financial markets because any negative sentiment from the Fed or a market heavyweight like Apple may push markets lower through the noted weak support.
FIGURE 1 - A chart of SPX price action with 50, 100, and 200 day simple moving averages and assorted trendlines.
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