Over the past several weeks we have pointed to signs that we think point to coming weakness, if not outright recession, for the US economy. Those signs have included The Conference Board’s Leading Economic Index, or LEI, dropping 3.8% over the six months through December, a trajectory that signals a recession is likely within the next 12 months; the contraction in the US money supply, as measured by M2, in 2022, the first time that has happened on an annual basis and a dynamic that speaks to liquidity being drained out of the economy; and maybe most importantly the inversion of the US 3 Month Bill and the US 10 Year Note and the US 2 Year Note and US 10 Year Note parts of the US Yield Curve, something that has taken place prior to every US recession of the past 33 years. We have also pointed out that betting on a recession is not the best bet to make as they are rare (the US economy has been in recession only about 12% of the time over the past 45 years) and that we don’t want to see the economy contract as the financial and emotional consequences of a downturn would be devastating for millions of Americans.

That said, we do think Wall Street would welcome a slowdown as it should prove the hope that bond yields have peaked, and the Fed is about finished raising rates (both points which should prove supportive of stocks). And while there remains, we think, multiple data points that point to a weaker economy into the back half of the year, there is one BIG reason not to bank on a recession and that is the US consumer. The US consumer accounts for about 70% of the US economy (see chart), so it stands to reason that if the consumer is okay the economy should be okay. And though there are signs of growing financial strain across our economy (total US household debt and US credit card debt are at record levels and more Americans are using savings to pay for everyday expenses), the consumer – and consumer spending – is supported by a very robust labor market. To put a finer point on the consumer spending point, we learned last week that January retail sales increased 3%, smashing expectations. Maybe the most important point to point out is that it’s never a good idea to bet against the US consumer.

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The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital Investments, LLC, a registered investment advisor. 534-BCI-2/21/2023