The ideological conflicts that tore the 20th century asunder are obsolete. The dominant “ism” in the world today is consumerism. So far this year in the U.S., the consumer has been keeping the economy and by extension the stock market afloat. The American shopper’s resilience also is laying the foundation for a new bull market.

Consumer spending accounts for about 70% of U.S. gross domestic product. Looking for a clue as to the direction of the stock market? In the words of the J. Geils Band: “First I look at the purse.”

Investors remain bedeviled by Federal Reserve tightening, U.S. debt ceiling brinkmanship, and tumult in the financial services sector. But a durable consumer and robust jobs market are countervailing factors.

The strength of the consumer has been a major pillar holding up the stock market. To be sure, consumers are showing signs of fatigue, amid higher interest rates and still-elevated inflation. However, they continue to loosen their purse strings, which bodes well for investors.

A recession this year is increasingly likely, but the downturn will be mitigated by low unemployment and healthy wage growth, two factors that in turn should continue to fuel consumer spending.

The U.S. unemployment rate hovers at 3.4%, the lowest since the Apollo 11 moon landing. At the same time, household balance sheets are still solid. When a recession comes this year, it won’t feel like one.

The media’s negative vibes…

Consumer income and sentiment aren’t always aligned, and we’re seeing that disconnect right now. Disposable personal income has risen this year, but the Consumer Confidence index has fallen. Consumers are more bullish than they’re telling pollsters,

Much of this pessimism is born of the banking mess, as well as overly negative economic reporting in the media. Last week’s initial jobless claims portray a labor market that’s still tight but softening. That’s hardly justification for the bleak tone of economic news coverage, which would have you believe that America currently resembles a Mad Max movie.

Consumer spending has been strong this year. First-quarter 2023 personal consumption expenditures (PCE) totaled $14.43 trillion, up 3.7% at an annual rate and 2.6% year over year. That’s the best growth rate in more than two years.

Last week’s retail sales report showed that spending in April increased at a slower-than-expected pace, but sales were up overall. The consumer is flagging, but not retrenching. Household-spending growth is not decelerating at the pace that other areas of the economy are experiencing. A gradual slowdown in household consumption, not a steep decline, is likely to occur this year.

Amid these crosscurrents, U.S. stocks last week held their own and finished in the green (see chart):

The main U.S. stock market indices closed mostly higher on Monday, as follows:

• DJIA: -0.42%
• S&P 500: +0.02%
• NASDAQ: +0.50%
• Russell 2000: +1.22%

Investors remained on edge and trading was choppy, as debt ceiling talks resumed between the White House and GOP. That said, the S&P 500 is on track for its third straight positive month.

As you can see from the above chart, stocks have rebounded year to date, When the stock market is doing well, retirement plans get fatter, which creates a “wealth effect” among consumers.

Emboldened by the gains they see in their Individual Retirement Accounts (IRAs) and 401k plans, consumers feel freer to borrow and spend, which lifts the economy, corporate profits, and the stock market. It becomes a virtuous cycle.

The general health of the consumer is evidenced by the latest earnings results from retail bellwethers. Q1 operating results from Walmart (NYSE: WMT), Home Depot (NYSE: HD), and Target (NYSE: TGT) beat earnings expectations. E-commerce giant Amazon (NSDQ: AMZN) posted earnings that easily beat estimates.

Apple (NSDQ: AAPL) crushed its fiscal Q2 earnings report. Year to date, Apple shares are up 34%.

In their forward guidance, a few major retailers (notably Target) sounded a note of caution that consumers were turning thrifty, as demand for discretionary items weakens. However, Walmart raised its full-year outlook.

Also keep in mind, pent-up demand generated by the waning pandemic hasn’t completely come to the fore. This demand will continue to snap back this year, especially in the services sector, which should provide another tailwind for the economy and markets. In particular, analysts predict a summer travel boom.

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It’s counter-intuitive, but it’s not bad news that we’re seeing recessionary signs. The Fed wants the economy to slow, to curb inflation. The current slowdown is motivating the Fed to adopt a less hawkish stance on rates. A pause in tightening would also encourage consumers.

Of course, the U.S. debt ceiling impasse is a major risk. The emergence of “burn-it-all-down” nihilists in the U.S. House has made it more difficult for Congress and the White House to reach a resolution, but the consequences of a default are so dire, odds still favor an agreement before the “X date” in June.

The week ahead…

The salient economic reports scheduled for release in the coming days include S&P flash U.S. services and manufacturing PMI and new home sales (Tuesday); minutes of the Fed’s Federal Open Market Committee meeting (Wednesday); initial jobless claims and pending home sales (Thursday); durable goods orders, personal income and spending, personal consumption expenditures (PCE) price index, and consumer sentiment (Friday).

The consensus of analysts is for the S&P 500 to close out 2023 with a gain in the low double digits. It’s a positive technical sign that the S&P 500 remains far above its 200-day moving average, which is the demarcation between long-term bullish and bearish trends. This indicator transcends the ephemeral ups and downs of the daily news cycle.

As long as the American consumer hangs tough, the overall bull case remains intact.

Editor’s Note: We could be facing a tectonic shift in the financial world that shakes out the winners from the losers. My colleague Dr. Stephen Leeb has pinpointed a way to not only survive this upheaval, but also thrive from it.

Dr. Leeb is chief investment strategist of The Complete Investor. His research has unearthed an obscure investment that’s poised to reap outsized gains from the paradigm shift he sees ahead. Click here for details.

John Persinos is the editorial director of Investing Daily.

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