In the most recent nonfarm payroll numbers, the U.S. posted the lowest unemployment rate in 17 years. According to Friday’s jobs report, the unemployment rate fell to 4.1%, which is the lowest level since 2000. This was accompanied by 261,000 jobs added in October, the highest figure in over a year and a rebound from September’s weakness that was largely heightened by Hurricanes Harvey and Irma.
Barring September, the nonfarm payroll numbers have been impressive over the past several months, which could help explain why the stock market has been on a bullish run regardless of some contradicting numbers from key economic indicators.
Theoretically, stock returns improve with increased consumer spending. One of the best barometers to determine whether consumers have been spending a lot lately is the consumer credit report. Based on the monthly report released by the Federal Reserve, the figures have declined significantly since September of last year and projections indicate this could continue for the rest of the year.
After hitting $20.83 billion in September, U.S. consumer spending is expected to drop to below $15 billion for the month of October.
Interestingly, this coincides with the odd month that posted weak nonfarm payrolls—and was affected by hurricanes. So it is possible the loss of jobs during that month resulted in additional borrowing, which boosted consumer credit numbers. Looking back, a report published by Value Walk found that even when consumer credit numbers were up early in the year, it was due to an increase in student loans and auto loans. Other loans types, like ACH loan applications and credit card spending, remained low, which indicates the consumer credit numbers did not necessarily reflect the level of spending on consumer goods.
Looking forward, with a majority of those affected in September back at work, consumer credit is expected to fall again in October. As for November and December, the projections that consumer credit will remain low is unlikely given high spending is expected during the holiday season.
The quarterly chart for U.S. consumer spending data agrees with the projections for consumer credit.
Analysts expect spending to decline significantly in the third and fourth quarters.
As such, investors might want to taper their market optimism given both economic indicators suggest consumers are not spending as much as the stock market rally implies.
According to the latest trading data, the Dow Jones Industrial Average has hit an all-time high as well as the SPDR S&P 500 Trust ETF (SPY, Financial) and NASDAQ PowerShares Trust ETF (QQQ, Financial), which track their respective indices.
This clearly suggests there is a massive optimism in the market that is even overshadowing fundamentals. There are analysts who believe the current bullishness of the market might be driven by the impressive rally in the price of bitcoin, but others say this is far-fetched.
Legendary value investor Warren Buffett (Trades, Portfolio), however, issued a warning to Wall Street in regard to accommodating big price movements in cryptocurrencies. This potentially proves the current market rally is tied to the rapid price increase in the cryptocurrency market.
Conclusion
In summary, consumer spending is a primary indicator for potential stock market returns. While reporting for this economic indicator is done on a quarterly basis, investors can use consumer credit data to get a sneak peek of what might be reported in the coming quarter.
Current data suggests consumer credit will remain low for the next three to four months, which is probably why consumer spending in the third and fourth quarters is expected to decline. This should be enough for investors to reconsider their bullish approach to the market as we close 2017.
Disclosure: I have no positions in any securities mentioned.
