Weekend Daily: Can Investors Trust This Rally?

Consumer Discretionary is defined by the Consumer Discretionary Select Sector SPDR ETF (XLY) and Consumer Staples is 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 4 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. 

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Mish in the Media

Mish goes over Meta and Palantir and discusses how trends are switching on BNN Bloomberg.

Two US Stocks may have bottomed out on CMC Markets. 10/26/2022

Mish is patiently watching Macro Trends unfold on Ameritrade. 10/26/2022

How to Trade Post-Earnings on Business First AM. 10/25/2022

Small caps start the party and rally to resistance on Bloomberg TV. 10/25/2022

Will earnings surpise to the upside? See Mish chat on Real Vision Daily Briefing with Maggie Lake 10/24/2022.

ETF Summary

S&P 500 (SPY): 386 support with 394 resistance level to watch. Russell 2000 (IWM): 181 support, 186 resistance. Dow (DIA): 326 support, 333 resistance. Nasdaq (QQQ): 277 now support, 284 resistance. KRE (Regional Banks): 62 support, 65 resistance level. SMH (Semiconductors): 188 support, 195 resistance. IYT (Transportation): 208 support, 214 resistance. IBB (Biotechnology): 127 support, 132 first resistance. XRT (Retail): 61 support, 65 resistance.

Mish Schneider

MarketGauge.com

Director of Trading Research and Education

Wade Dawson

MarketGauge.com

Portfolio Manager