Stocks Powered by Better-Than-Expected Economic Data

While 2022 was an ugly year for the stock market, 2023 has been a different story thus far. Stocks have moved higher for most of 2023 thanks to improvement on the inflation front and better-than-expected economic data. Let’s dive in.

Inflation rates peaked last summer and have been steadily declining ever since. Last month the Producer Price Index (PPI), which measures wholesale inflation, showed a minimal increase of 0.13% year-over-year. This indicates that the prices businesses pay for goods and services remained relatively unchanged compared to the same period last year.

For consumers, there have been positive developments in both the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) reports. The latest increase of 2.97% is the smallest since March 2021. This comes after several years of out-of-control inflation. Although it is good news that inflation continues to slow, the Federal Reserve’s target is 2% and inflation has not reached that level yet.

It shouldn’t come as a surprise that as inflation rates have come down consumer sentiment has gone up. Improved sentiment should support further consumer spending.

As we entered 2023, many economists were forecasting a recession due to the Fed’s rate-hike campaign. Not only has a recession not materialized, but the economy has actually strengthened as the year has progressed. Last week’s GDP report showed that in the second quarter, the economy grew at a 2.4% annual rate adjusted for inflation. This was an improvement from the 2.0% growth experienced in the first quarter.

The Atlanta Fed tracks economic data as it is released and uses this information to forecast GDP for the current quarter. While there is still a month and a half left in the third quarter, the latest estimate is 3.9%. Anything north of 3% would be remarkable considering the Fed has been trying to slow growth for the last 15 months.

Whether we are talking about GDP, jobs, productivity, wages or consumer spending, the data has consistently exceeded expectations. One of the metrics we track is the Citi US Economic Surprise Index which gauges the variance between actual economic data and analysts’ expectations. When economic reports are better than expected, the index rises, and when reports fall short of expectations, the index declines.

This week the Citi Index hit its highest level in over three years.

So far, this has been a good year for stocks, powered by a declining inflation rate and better-than-expected economic data. However, history has shown that August and September tend to be more challenging months for markets. If the downtrend in inflation continues into the fall and the economy remains resilient, any decline in stocks could be a buying opportunity.