Unlike most other countries, the US GDP of economic activity is predominantly driven by consumer spending. Consumer sentiment levels should provide a forecast of rising or falling future spending if the theory that discouraged people spend less than optimistic people. Currently, consumer sentiment is at the second-lowest level in recorded history since the University of Michigan started monitoring consumer sentiment 73 years ago.

Based on this data, one would presume that consumer spending would decline. However, it appears the opposite is true. Even though consumers are in a state of pessimism not seen in 73 years, they are working, spending, and saving their hard-earned income.

The Bureau of Economic Analysis reported last week:

• “Personal income increased $95.7 billion (0.4 percent at a monthly rate) in August, according to estimates released today by the U.S. Bureau of Economic Analysis. Disposable personal income (DPI)—personal income less personal current taxes—increased $86.1 billion (0.4 percent), and personal consumption expenditures (PCE) increased $129.2 billion (0.6 percent). Personal outlays—the sum of PCE, personal interest payments, and personal current transfer payments—increased $132.9 billion in August. Personal saving was $1.06 trillion in August, and the personal saving rate—personal saving as a percentage of disposable personal income—was 4.6 percent.”

Seemingly, the reason they are missed by consumers is that they have jobs. In fact, more Americans are working today than in the history of this country, and many with respectable 401 (k) accounts have bought their homes with fixed-rate mortgages with interest rates below 3%.

Nonetheless, what can we forecast about this holiday season of retail sales? The lowest consumer sentiment reading in the University of Michigan’s history was recorded just two years ago in 2022 (consumers have been in a long-term funk!). In that year, 2022 holiday retail sales were up 5.3% from 2021. TheNational Retail Federationprovided the following analysis of the 2022 holiday sales on January 18, 2023, stating:

• “Retail sales during 2022’s November-December holiday season grew 5.3% over 2021 to $936.3 billion, falling short of the National Retail Federation’s forecast amid continuing inflation and high interest rates, NRF said today. While holiday growth was less than expected, sales for the year grew 7% over 2021 to $4.9 trillion, meeting NRF’s forecast of between 6% and 8% growth for the year.

• “The last two years of retail sales have been unprecedented, and no one ever thought it was sustainable,” NRF President and CEO Matthew Shay said. “Nonetheless, we closed out 2022 with impressive annual retail sales and a respectable holiday season despite historic levels of inflation and interest rate hikes to cool the economy. Consumers shopped in record numbers and retailers delivered positive holiday experiences to inflation-wary consumers, offering great products at more promotional price levels to fit their stretched budgets. “

I have read that retailers are concerned about the low consumer sentiment and were more conservative with orders early this year in preparation for the holiday season. I expect retailers to be aggressive with sale promotions as we get closer to the holidays to ensure a good start to the season. What that means is if you see an item you like, don’t wait, as there may not be very many others in inventory.

With stable consumer spending that represents 66% of the US GDP, it would be reasonable to presume corporate revenue and profits would be stable but not robust. Last week, the US Bureau of Economic Analysis released the US quarterly corporate profits report. Since Q4 2024, corporate profits have been mildly declining, with the third quarter only slightly increasing 0.2% since the previous quarter. This is a disappointment to investors, as preliminary, overly optimistic estimates were for a 2% increase from last quarter. Our analysis would be that although consumers are spending, they are being discerning with their spending and looking for bargains.

If consumers continue to be discerning with their spending, I expect businesses this holiday season will need to prop up sales by offering discounts and bargains, rather than lowering prices. This strategy prompts sales but at the cost of lower profits. However, when consumer sentiment and demand recover, it is easier to discontinue offering discounts and coupons than to raise prices.

What Does This Mean to Me?

Consumers are maintaining a steady level of spending while corporate sales and revenue are stable. Wall Street does not like surprises. Although household stability and corporate revenue reports are not blockbuster news, the lack of surprises is good news for investors. Earlier this year, there was a rollercoaster of market-moving news coming out of Washington, shocking Wall Street. Since late May, investors have been enjoying a period of mild surprises out of Washington supplemented with moderate good news from corporations.

As a result, investors are increasing their stock holdings and pushing up the market. The S&P 500 index has had a solid rally since April 9 and continues to close at new highs. Currently, the index is technically in a solid positive trend above its 20, 50, and 200 Day Moving Averages (MDA).

NASDAQ, the tech-based index, is also in a solid trend since April 9, closing at new highs almost weekly. Demand for AI chips and software, data centers, new sources of energy, and computing infrastructure continues to grow at hyper-speed, with billions more committed to this industry.

Below are the YTD returns of the major indices, with the foreign MSCI Ex US still leading the major US indices:

• MSCI Ex US:25.90%

• NASDAQ:17.34%

• S&P 500:13.72%

• Dow Jones Industrial Average:9.06%

• S&P Bond:6.62%

• S&P 400 Mid Cap:4.57%

• S&P 600 Small Cap:2.92%

Note that the US Bond index is now outperforming both the S&P 400 and S&P 600. These two indices have significantly lagged the S&P 500 and NASDAQ. Investors have distinctly focused their portfolios on large US growth companies and especially technology companies.