The Problem of Mixed Market Signals and Correlations

Confounding market and economic signals persist as the year’s end draws near. In a year punctuated by heightened uncertainty as investors attempted to navigate a confluence of risk factors, stock and bond correlations proved a significant challenge to traditional portfolios.

Markets rallied this week on news of a cooler-than-expected CPI print for October, alongside a significant drop in wholesale prices. It’s hopeful news that could bring an end to Fed interest rate hikes and in other times would be seen as a potential inflection point for markets.

Alongside the positive news came reports of falling retail sales. Retail sales dropped 0.1% month over month in October, reversing a months-long trend of strong gains. For reference, retail sales grew 0.9% in September. Slowing consumer spending is a positive signal for inflationary pressure but also could lead to increased economic slowing.

There is also increasing concern about the resiliency of the U.S. consumer. Credit debt is at a record high — $1.08 trillion — as a higher cost of living gouges U.S. households. High interest rates from used cars to mortgages alongside the resumption of student loan payments will likely continue to weigh heavily on consumer spending.

Add in the muted forecasts from many large-cap companies in the most recent earnings season, the knock-on effect of rising rates on commercial real estate lending, the ballooning U.S. deficit, and the complexity persists.