Today’s near-unanimous decline in the stock market has some investors taking a pause. The release of the January PCE Price Index data is the cause of today’s consternation. With the personal consumption expenditures (PCE) index rising 5.4% on a year-over-year basis, investors are taking a bearish tone today.
When consumer spending is rising, one might think that’s a good thing for the economy. And it generally is. More spending means more robust earnings outlooks for companies, who then recycle the money back into investing into future growth. That’s the kind of cycle most want to see during bull markets.
However, with inflation also persistently high, this robust consumer spending is creating problems for those betting on a more accommodative stance by the Federal Reserve. At the same time PCE rose, the country’s core PCE index (one of the Fed’s go-to inflation gauges) saw price increases of 0.6% on a monthly basis and 4.7% on a year-over-year basis. Thus, much of this increased spending may simply be tied to inflation.
For inflation to come down, interest rates will likely have to continue to rise. Let’s dive into what this means for investors, and why there’s such a pervasively bullish narrative today.
PCE Price Index Creates Concern Among Investors
We’ve been in a “good news is bad news” situation for some time. The hotter the economy gets, the more investors bet on increased rate hikes. And with higher interest rates generally comes slowing economic activity and lower stock prices. That’s not great for investors.
Of course, there are myriad factors to consider when looking at this data. Americans’ personal savings rate also ticked higher by 0.2% in January. This suggests while folks are spending more, they’re also putting more away. And while a personal savings rate of 4.7% came in better than expected, it’s still far off from the double-digit levels we saw during the pandemic.
Thus, these data are hard to read. Overall, it appears the market is tying higher spending to higher rates. Indeed, this seems to be the right call for now.
The probability of a soft landing is getting more and more difficult to ascertain with each reading. At least, that’s my take. For now, uncertainty is being priced into stocks, and that seems to be what’s likely to continue from here.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
