Can Investors Trust This Rally?

October 30, 2022

Mish's Daily

By Mish Schneider

Written by Wade Dawson and Mish Schneider

Consumer Discretionary is defined by the Consumer Discretionary Select Sector SPDR ETF (XLY) and Consumer Staples defined by the Consumer Staples Select Sector SPDR ETF (XLP). The chart displays the price ratio, or the price spread, of consumer discretionary over consumer staples since 2020.

GDP data painted a somewhat roseate picture for the US economy this week.

Yet inflation is still rising.

The PCE price index climbed by 0.3% in a month and was up 6.2% from the prior year. Still very far from the Fed's 2% inflation target.

Consumer spending has moderately increased while sentiment rose more than expected.

GDP numbers, including consumption, only tell part of the story. Consumer discretionary can be contrasted with consumer staples, a classification for companies that produce daily necessities.

As represented by XLY, consumer discretionary was up over the last five days by 2.0%, and consumer staples, defined by XLP, was more than double that - 4.5% over the week.

The chart above shows that consumer staples has been the clear winner since December 2021.

Is it too early to declare that the US economy has turned a corner?

Like CPI out earlier this month, the latest PCE figures released on Friday underscore inflation's entrenched nature and provide more data that the US economy is still facing some headwinds.

Granny Retail (XRT) is the backbone of our economy, and if consumers can't afford to live comfortably and continue to spend, it will spell trouble.

Families are cutting back on discretionary purchases. Plus, folks are doubtful the Fed has its back to curtail inflation.

Americans are using credit cards to finance major purchases. US credit-card debt is back to pandemic levels, as seen below.

A recent Census Bureau survey found that four in 10 households said it had been somewhat challenging to cover usual household expenses.

Consumer staples are generally less impacted by inflation than discretionary products, so a shift in consumer spending could mean trouble for companies that produce luxurious goods and services.

Nonetheless, Granny Retail (XRT), a basket of consumer discretionary and staples, is holding up for now.

However, with wages rising and the Fed continuing its tightening campaign, it remains to be seen just how long this can last.

It's important to remember that while markets may appear strong in the short term, they can quickly turn – so investors should exercise caution and practice sound risk management.

If you're looking to stay ahead of the curve, it's crucial to monitor consumer behavior. With MarketGauge's trading platform and Mish's premium service, you'll get alerts on today's fast-moving stocks to beat the market.

You can sign up for a free consultation with Rob Quinn, our Chief Strategy Consultant, by clicking here to learn more about Mish's top-rated risk management trading service.

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