This week we see the all-important inflation figure, expected around 2.8%. Investors have been whipsawed a bit by on-again off-again expectations about the Fed cutting rates. Because inflation is one of the core inputs into rate expectations, this week’s data could push markets around. This week we also see retail sales figures. Since consumers have largely kept the US economy afloat over the past year, these figures will be scrutinized closely.
Earnings season is coming to a close with 90% or so of US companies having reported earnings. Overall, earnings posted better than expected, with profit growth around 12% over this time last year. Additionally, tariffs have been less of a concern among both analysts and business executives now that policy is (mostly) ironed out.
As I have mentioned many times before, all of the traditional recessionary indicators are flashing red. The yield curve, the unemployment rate, PMIs, and several others have been indicating contraction for many months now. Yet, the market powers higher and companies continue to earn higher profits. While I have urged caution up to now, I admit to being at a crossroads. It is possible that the traditional signals are simply too distorted by any number of things to be reliable, in which case it may make sense to turn back up the risk in your portfolio.
Before doing that however, we should assess the costs of being wrong. If the signals are indeed accurate and the market enters a recessionary phase in the coming months, the costs of that is likely higher for individuals within about 5 years to a goal. For investors with 10 years or more until their goal, that cost may not be so high. In any case, your goals will determine the types of risks we can afford in your portfolio. Discussing this with an advisor just makes sense in this confusing environment.
Chart of the Week
Breaking down US GDP into its component pieces we see the volatility in trade that has characterized the last six months. However, looking past that (the pink and blue bars in the chart below) reveals an ongoing trend in personal consumption that has been concerning. Before 2025, personal consumption had been adding some 2.5 percentage points of growth. In the past two quarters it has added less than half of that. Trade volatility may be hiding the real problem: are US consumers reaching exhaustion?
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