U.S. first quarter Gross Domestic Product for 2023 was revised upward this week indicating that consumers are spending like drunken sailors. That's good for America as was the latest inflation data for May.

 

Between January and March of this year, the economy grew at a 2 percent annual pace. That caused the Commerce Department to sharply upgrade its previous yearly estimate of 1.3 percent. Although strong, it has continued to decelerate from a 3.2 percent growth rate in the third quarter of 2022 and a 2.6 percent increase in the last quarter of 2022.

 

Despite rising borrowing costs, the consumer continued to defy expectations. Consumer spending rose at a 4.2 percent annual rate in the first quarter. That is important, given that their spending accounts for 70 percent of the growth in the economy. And as long as the labor market continues to strengthen, workers will continue to spend. This week's unemployment claims declined, bolstering the view that employment is still quite healthy.

 

The Personal Consumption Expenditures Price Index, a gauge favored by the Fed, came in lower in May at 3.8 percent, which was the lowest level since April 2021. While inflation has halved over the last year, it is still high above the Fed's target of 2 percent. It is the reason Federal Reserve bankers continue to pound the table on maintaining their tight monetary policies. Market observers are now expecting another interest rate hike in July, and bets are fifty-fifty on one more hike after that.

 

Economists have continually pushed back the timing on exactly when the economy will dip into recession. Some think that this long-anticipated recession could begin in the third quarter but might well wait until the fourth quarter. There are some estimates it won't happen at all this year.

 

Liz Anne Sonders, the chief investment strategist for Charles Schwab, has argued that we have been in a rolling recession for the last two years plus. Housing and manufacturing, for example, have already suffered downturns. Other areas, such as the services sector, are still growing, but will likely be hit by a slowdown in the future. So rather than look for a formal traditional recession, investors should instead be on the lookout for the next areas to roll over. I think she has it right.

 

Good news on the banking front in the form of the successful stress test by the nation's 23 largest banks lifted the banking sector this week. Each year, the Federal Reserve Bank administers a severe recession scenario to identify if these banks can maintain the minimum capital levels while continuing to provide credit to the economy.  Given the worries sparked by the failure of three regional banks earlier this year, the results were a welcome sign in shoring up investors' worries over the U.S. financial system.

 

Last week, I wrote that I was watching the 4,350-4,320 level on the S&P 500 Index. I was also watching technology for a bottom. The QQQ, which is the symbol for the tech-heavy exchange-traded fund reflecting the NASDAQ Index, had a downside risk of 352. We hit an intraday low on Monday of 4,328 on the S&P 500, and 357 on the QQQs. We bounced from there as I expected, not too shabby for a guesstimate, but calling these levels is more about luck than anything else. So where to next?

 

It is the end of the quarter today, so market action on Friday was all about window dressing. Money managers want to close their books with a list of winners to show their clients so what stocks that worked over the last three months were bid up to dress up results.  I can see more gains into a holiday-shortened week and possibly further upside into the second week of July. We could see 4,600 or so before another bout of profit-taking sets in. Longer term, I am expecting 4,800 on the S&P 500 Index, but we have plenty of time to achieve that target.

 

Have a great Fourth of July; you've earned it.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.