As I’ve mentioned before, I find it beneficial to check in on the economy regularly to maintain a big picture perspective. Economic growth meaningfully contributes to some of the key factors that drive the stock market over long periods of time. Yes, other factors not related to economic growth can drive stock prices but usually are only transitory in nature. As a market participant, it’s fun to understand and talk about what’s going on right now and how it’s impacting stock prices but as an investor the bigger picture and long term are what matter most. Understanding the bigger picture helps us to put short-term noise in perspective while seeking the longer-term signal that is quite informative when making asset allocation and other investment related decisions. 

As I have shared before, I monitor several variables to provide me with insight into the broader health of the economy. I am not an economist and am not making forecasts. I’m simply trying to keep a finger on the pulse of the economy so that I can be properly informed in my decision- making process. EDITORIAL NOTE: The short-term noise from talking heads and their media outlets are just that…noise. Learn to pay attention to what matters most and to block out the distractions. You’ll experience more peace and be a better investor.

Retail Sales

Since two-thirds of the US economy is still driven by the consumer, retail sales are always a good place to start. If consumer spending is healthy, then chances are the economy is doing okay. 

After the sharp spike earlier this year on the anniversary of the pandemic lockdown of 2020, year-over-year growth in retail sales has been decelerating. It did tick up nicely in October to a strong 9.5%, implying the consumer remains on stable footing. The next few readings will be of interest to see if the above-trend momentum is maintained. 

Industrial Production

The next indicator I monitor is growth in Industrial Production, which captures the manufacturing component of our economy. Yes, the US economy has become less and less of a manufacturing economy, but this indicator still provides valuable context regarding the broader health of the economy.

Similar to retails sales, we’re seeing a deceleration in year-over-year growth in industrial production but observed a slight uptick in October. For now, this indicator remains in solid growth territory. Again, the next few months’ readings will be of particular interest. 

Employment Growth

Employment growth is often considered a lagging indicator, but it can still provide valuable information. If jobs are being lost, then people presumably have less money to spend. If jobs are growing, people presumably have more money to spend.

Job growth continues to be solid as the economy pushes towards regaining pre-COVID employment levels. 

Housing Starts

Housing is an important part of the US economy. People need places to live, and construction of new housing contributes to economic growth and reflects improving individual economic situations for Americans.

We have observed a softening in this data set in recent months with a slightly negative reading in October. This is a very volatile data set, so we expect to see swings in the data. We aren’t rattled by a couple of months of softer readings, especially since they were still positive growth readings.  

Real Personal Income

In conjunction with having a job, having money is another requisite for people to be able to spend. If that money source is growing that’s even better.

We continue to observe softness in this important metric, largely due to higher inflation readings. If inflation ends up being more persistent than what many believe, this metric will be lower for longer and could lead to lower consumer spending overall as consumers lose more and more of their purchasing power. It’s too soon to tell, in my opinion, although there are a lot of very smart people who believe inflation will be higher for longer. Only time will tell. 

Interest Rates

Interest rates are probably the most important variable in financial markets because they are used to determine the value of everything from bonds to stocks to real estate to individual companies. Interest rates dictate how much we earn in our savings accounts to how much we pay on our mortgages. We all would like higher rates in our savings accounts but most of us aren’t interested in higher mortgage rates or lower asset values. A key relationship to remember is that higher interest rates usually equate to lower asset values while lower interest rates tend to equate to higher asset values, all else equal. As a result, it’s important to keep an eye on interest rate levels as well as the direction they are headed and how quickly they are moving in that direction. 

How do interest rates move?

With the exception of a few rates established by the Federal Reserve, most interest rates move according to supply and demand. When rates are high and viewed as being more attractive than other sources of returns, demand will increase pushing rates down to some degree. When rates are perceived as low to other return sources, demand will be weak, and rates will rise in reaction to attract more interest. This is how interest rates function in a truly free market without central bank intervention. Central banks have several tools they use to “guide” rates to a range of where they would like them to be. One of the more important rates to monitor is the 10-year US Treasury rate. This rate has a meaningful impact on mortgage rates, asset valuations and returns on many bond portfolios. If there’s one rate you’re going to track, this might be the best one.

The 10-year remains at low levels and could be in and around these levels for years to come for various reasons we will not go into right now. The important point is that there likely won’t be a secular shift down in asset prices if rates remain at these levels, all else equal. 

What does this mean for you? It likely means asset price volatility in your investment portfolios will be moderate with occasional acute moves up or down but ultimately settling back down again. If interest rates are stable, asset prices tend to remain stable. This trend won’t last forever, but I don’t believe it’s going to end soon.