Highlights for this week include:

Better-than-expected economic readings, including recent retail sales and industrial production releases, have resulted in significant upward revisions to third quarter economic growth estimates. This is a positive development for stock profitability, but the Leading Economic Index continues to fall, which keeps our optimism on the outlook restrained.

While the 10-year Treasury yield now approaching 5.0% presents a significant headwind for stocks, the S&P 500 Index has impressively rallied off important technical support around the 4200 level, which suggests recent weakness is a normal pullback within the ongoing bullish trend for stocks.

Retail Sales and Industrial Production Add to Better-Than-Expected Economic Readings

Retail sales increased 0.7% in September, more than double the consensus of 0.3%. In the third quarter, retail sales shot up at a 6.9% annualized rate, the most in over a year. On a y/y trend basis, retail sales picked up 3.1%, the fastest pace since March.

Consumers continue to benefit from a tight labor market, firmer income growth that is benefitting from lower inflation, and remaining excess savings. Despite downside risks from the resumption of student loan payments and higher gasoline prices, the current momentum in consumer spending is supportive of a continued expansion in the broader economy.

Industrial production increased 0.3% in September, beating the consensus estimate of 0.1%. Industrial production increased at a 2.5% annualized rate in the third quarter, stronger than the 0.7% gain in the prior quarter, as growth accelerated in the third quarter.

These and other better-than-expected economic readings have resulted in significant upward revisions to third quarter economic growth projections with the Blue Chip consensus estimate now at 3.5% for third quarter GDP growth after starting the quarter expecting zero growth.

Initial jobless claims (a timely economic indicator) continue to confirm labor market strength from other important indicators. The current level is in line with the pre-pandemic trend and is low by historical norms. A healthy labor market with wage income now above inflation is consistent with continued economic growth. All of this suggests that without recession on the near-term horizon, the Federal Reserve can keep policy restrictive for longer to move inflation down toward its 2.0% target.

Leading Economic Index Continues to Signal Slowdown

The Leading Economic Index (LEI) provides an early indication of significant turning points in the business cycle and where the economy is heading. The LEI fell again in September, marking a year and a half of consecutive monthly declines since April 2022 and signaling economic weakness ahead.

In September, negative or flat contributions from nine of the index’s ten components more than offset fewer initial jobless claims. The LEI has been signaling recession for some time and the Conference Board still expects a mild recession in the first half of 2024. However, it’s possible that the LEI components, which favor manufacturing, credit, and consumer sentiment, could be underestimating the strength of economy in light of excess savings and government stimulus.

While current healthy economic readings are encouraging, weakness in the LEI and other important leading indicators is keeping our optimism on the outlook restrained.