The stock market and economy are in an interesting place. The S&P 500 (NYSE: SPY) is only about 1% off it's all-time highs and up more than a 100% over the past year, but there is an abundance of economic pessimism.
There's certainly a slowdown coming but that is different than a recession, and the economy can still grow at healthy rates, while a tight labor market ensures wage growth. Of course, inflation is also complicating this picture. Then, there are concerns about next year's consumer spending outlook due to higher prices and no stimulus.
Given these conflicting trends, it's always useful to check in on economic data:
Inflation Data
Inflation readings have continued to trend high on the consumer and producer side. September's CPI increased 5.4% on an annual basis and 0.4% monthly. Without food and energy, it was a 0.2% monthly and 4% annual increase.
Used car prices continue to decline. Additionally, there is reason for optimism especially if the inflation spike is more due to supply chain issues as these will likely be worked out over time especially as countries reopen.
Retail Sales
One market maxim is to never bet against the U.S. consumer. This continued to be the case as retail sales increased by 0.7% despite expectations for an 0.2% drop. The drop was expected as this quarter would be compared to last quarter's when there was still a tailwind from stimulus payments. Additionally, the delta variant's spread and expiration of unemployment benefits had caused negative reactions in other types of data.
Manufacturing
Manufacturing is also doing well as the lastest ISM reading came in at 61.1 with anything above 50 indicating an expansion. Leading indicators like Hiring and New Orders are quite strong which indicates that firms in the sector are optimistic also.
Manufacturing represents about 12% of the economy but often is the source of marginal swings in growth and contraction. Over the last few months, it's outperformed due to optimism about infrastructure spending, capital expenditures, and global growth.
China
Of course, China's economy is in the midst of a messy transition from a manufacturing economy to more of a service and consumer-based one. However, China's economy remains manufacturing-centric, so it wasn't good news when September's ISM showed a slight decline with a reading of 49.9 vs expectations of 50.1.
Markets didn't really move despite the miss as it seemed that it was expected. Many attributed the miss to electricity issues in addition to supply chain bottlenecks, shortages, and delays in shipments.
Overall, China's market has been an underperformer over multiple timeframes. Currently, there is an interesting bounce that could entice traders but investors should focus on opportunities with less downside and risks.