Three Generations of Bull Markets: Sustaining the Economic Momentum?

The market initially predicted the possibility of entering a "mild recession" in the latter half of 2023. However, with the release of new data, this expectation has been revised to a more optimistic outlook. According to the latest data, the US economy grew at a rate of 4.9% in the third quarter, the fastest pace in nearly two years. This is primarily attributed to a significant increase in consumer spending, with personal expenditure growing by 4%, marking the largest surge since 2021. Additionally, CPT Markets analysts noted a growing trend in the nominal GDP growth rate in the US over the long term, leading many to believe that the upward trajectory of asset prices will only accelerate further. As a result, many experts jokingly refer to this phenomenon as the "three generations of bull markets," signifying the continual prosperity of the US economy over the span of three generations.

Despite the continuous rise in interest rates, the US consumer market has displayed unexpectedly strong performance, credited to a tight labor market and accumulated household savings during the pandemic. Notably, household debt burdens have remained at around 10%, roughly one-third of what it was during the peak of the 2008 financial crisis. However, while the consumer spending data appears favorable, CPT Markets analysts caution investors to pay closer attention to the details. In terms of excess savings, the top income group holds between 32% to 67% of total savings, whereas the lowest income group holds only 4% to 29%. This has raised concerns about whether lower-income groups are facing potential risks. For instance, the recent increase in delinquency rates for car and credit card loans has led to concerns that lower-income groups might have already used up most of their excess savings. Additionally, there is a high likelihood of a worsening situation in the repayment of student loans, which could further burden the financial situation of young families, leading to downward pressure on disposable income. Evidently, the spending of lower-income groups has already exceeded their income, prompting them to change their shopping habits, avoiding mid-range stores like Target and Walmart and instead opting for discount stores in an attempt to save expenses.

Apart from consumer spending, another major contributing factor is businesses' re-stocking of inventories. This measure has contributed to an overall economic growth of about 1.3 percentage points. However, readers should note that inventories and net exports may fluctuate between quarters due to seasonal changes. Therefore, expanding the time frame of observation would provide a better understanding of the current situation. What has surprised the market is the transformation of the real estate sector from being the largest burden on the economy to a slightly positive contributor. Residential investment made a contribution to the third-quarter GDP growth for the first time in the last 10 quarters. Surprisingly, this was achieved even with mortgage rates exceeding 8%. CPT Markets analysts mentioned that this is due to the difficulty for most homeowners to sell their assets because of the high interest rates, leading to a reduction in the inventory of existing homes. This has driven potential homebuyers towards the new housing market, boosting the growth of single-family home construction.

The current market outlook on the US economy is optimistic, with even the Federal Reserve upgrading its economic forecasts and incorporating the scenario of "no recession." The current optimistic sentiment primarily stems from a more moderate inflation compared to the past, the nearing completion of the Fed's rate hike cycle, a robust labor market, and unexpectedly strong economic growth. However, CPT Markets analysts issue a severe warning, suggesting that the market seems to be neglecting the lagged effect of monetary policy. Such a bullish view is entirely based on outdated economic data, and future tightening of monetary policy will continue to play a role in the overall economic environment. In other words, there could be a more significant degree of negative adjustments in the future. Generally, changes in interest rates mainly affect new borrowers, and those with fixed-rate non-maturing debts are also unaffected. In short, the "lag effect" is the time it takes for new debt issuances to have a sufficient impact on the economy, thus slowing down economic growth. Furthermore, the accuracy of the Federal Reserve's economic forecasts has consistently been less than satisfactory. Observations since 2011 indicate that the median forecasts by the Fed have yet to be accurate. Moreover, as seen in the chart, the Fed often displays excessive confidence, leading to repeated data revisions. It is worth noting that currently, most Wall Street economists remain confident that the economy will not enter a recession, but they completely disregard the fact that outdated economic data cannot keep up with the current economic situation. Therefore, it can be concluded that the optimistic information in the market is often just the best speculation. With the collection and adjustment of subsequent economic data, there is a high probability that the economy will undergo substantial negative revisions.

Author: Reese Fan, Holmes C.

Editor: Raouf Boussaoui

02 Nov 2023