On May 9^th it was announced that U.S. jobless claims unexpectedly rose to 231,000 over the last week. That’s the highest level since last August. You would think that’s terrible news – right? So why did the stock market jump up? Anything that might cause consumer spending to decline is viewed as highly positive by the equity markets.

Here’s the logic: If consumer spending declines = inflation starts to cool = the Fed lowers interest rates = the stock market goes crazy = we all live happily ever after (until the next manufactured crisis hits).

In the brief period since the end of the last quarter, we’ve seen the impact of unmet inflation expectations on financial markets. Last quarter ended with the S&P 500 at 5,254.35. By April 19^th (when it was feared that the Fed would take no action) the S&P 500 dropped -5.5% to 4,967.23. Today it’s back up 5.06% to 5,218.45.

Here’s a scorecard for what to wish for if you want the markets to come roaring back:

1. A decrease in GDP
2. A decrease in Consumer Spending 
3. Unemployment Rises
4. Wages Fall
5. Mortgage Demand Falls

This reminds me of the saying, “Be careful what you wish for.”

It’s also hard to know whether each of these factors are leading or lagging indicators. This next chart shows Consumer Spending versus Inflation. Going back to 2017 it’s hard to tell which came first, the chicken or the egg – Spending or Inflation. Most recently, inflation is presumed to cause spending slowdowns. Yet earlier in the chart, the opposite was true.

Worldwide, there are indicators that various economies are slowing. The EU may be the first to start lowering interest rates, followed by the UK. We are likely to be last to cut rates. It’s interesting that, behaviorally, we’re different from other areas of the world when it comes to spending money (that we don’t have). So, if you’re looking for a silver lining in the inflation story, pay attention to what the EU does strategically. At the moment, it is the best “economic indicator.”

Rick Adkins, CFP®, ChFC, MBA

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