LPL: Consumers Getting A Mixed Bag

Key Takeaways:

Homebuilders Look for Opportunities

One of the confounding experiences for consumers these days is within the housing market. Prospective buyers are reading the tale of two markets when it comes to residential real estate.  After a volatile 2022, the pace of new home sales has stabilized around the pre-pandemic rate.  With supply of existing homes still below 50% of its pre-pandemic level, homebuilders stand ready to take advantage of any increase in demand. Currently, activity is strongest in the Midwest and West, with supply chain issues and inclement weather negatively affecting builds in the Northeast. Both permit issuances and new housing starts saw recent increases and beat their respective forecasts.

Amid low inventory of existing homes on the market, new home sales will likely remain stable to meet the demand. As mortgage rates fall and the Federal Reserve (Fed) pivots away from hiking rates, homebuilders might expect continued growth in business activity.

An Appetite Not Yet Satiated 

Confidence in November rose from last month, but only because of October’s significant downward revision. As prices for durable goods fall, consumers retained an appetite for purchasing major items such as automobiles, big appliances, and homes. Although, more respondents reported jobs were becoming harder to find, meaning a slowdown in spending is likely as the year wraps up.

Investors should remember that economic data often gets revised downward as the economy downshifts, as we saw in the Conference Board report. The three-month average for consumer confidence fell for the third consecutive month, reaching the lowest since August 2022. As we saw in the holiday sales figures, the consumer is still spending but much depends on the job market. All eyes should be on the upcoming jobs report on December 8. As the labor market cools, investors should expect consumer spending to slow down, but so far, it looks like a soft landing. All in, the data supports the Fed’s likely decision to keep rates unchanged at next month’s meeting.

Another Mixed Bag

This morning’s revised estimate for Q3 GDP was full of surprises. Revisions pushed headline growth to 5.2% annualized from 4.9%, but investors must look beneath the headlines.

Consumer spending was revised down to 3.6% annualized from 4.0% but government spending was revised up. Consumer data is often revised downward as the economy downshifts and we see this again in the latest GDP report. Looking ahead, we should expect inventories to subtract from Q4 growth and possibly see less support from consumer spending.

In addition to weaker consumer spending, markets are digesting Fed governor Christopher Waller’s apparent pivot, as he commented yesterday that the Fed could hold rates steady at the upcoming meeting. Investors know that Waller had been the most hawkish of Fed officials, so this is market-moving. Treasury yields and the U.S. dollar fell on the news.

The Bottom Line

The Fed could find themselves in a sweet spot. Inflation is trending lower, the consumer is still spending but at a slower pace, and the Fed could end its rate-hiking campaign without much pain inflicted on the economy. Looking ahead, markets will hotly anticipate the upcoming Beige Book release for anecdotal evidence on the state of the economy, but so far, the economic data are suppressing yields and stimulating the appetite for risk assets.

One additional item to watch is the U.S. dollar. As the Fed started to sound less hawkish, investors saw a decline in the dollar. A weaker dollar is often good for emerging markets, potentially providing an opportunity in the near future. LPL Research currently holds a negative view of emerging market equities but acknowledges valuations are attractive and that certain markets such as India and Brazil are intriguing.

View enlarged chart

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks  

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value

SOURCE: https://lplresearch.com/2023/11/29/consumers-getting-a-mixed-bag/