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If you have been reading Market Musings this week, you will know that my view of the outlook for stocks has changed. A bifurcation of the economy is suggesting that while businesses have been cutting back in anticipation of tough times, the labor market has remained tight. That in turn, I suggested, has allowed consumers to carry on as if nothing is happening. Business to business activity, including advertising spending, may be dropping but overall activity is holding up well. That all indicates that a so-called “soft landing” for the US economy is possible, maybe even likely, and this morning’s news supports that contention.
First, there was continued bad news on the online advertising front and social media, when Facebook parent Meta (META) reported lower than expected revenue and EPS while also cutting guidance for next quarter. The headline disappointment were the losses in the company’s “Metaverse” project, but those losses came with a backdrop of declining ad revenue despite signs of hope in terms of user numbers.
From a company-specific standpoint, Meta’s commitment to the metaverse idea makes sense in the context of the disappointing results from its core business. If the value of the digital advertising market has peaked, as looks to be the case with Apple (AAPL) positioning themselves as privacy-minded while they restrict what their competitors can do on their products, then investing in a direct-to-consumer business makes perfect sense. Of course, it remains to be seen if the whole metaverse and AI thing really is the future; if you believe it is, the billions of dollars going to the metaverse looks like sound investment rather than out of control costs and META looks pretty cheap below $100.
More broadly, though, the breakdown of Meta’s report supports the idea of a bifurcation in economic activity. Their corporate clients — online advertisers — are cutting back, while their consumers — Facebook users — are not. It seems that the slowdown in corporate activity is in anticipation of a slowdown in consumer activity that, so far, hasn’t materialized. If that continues, then it is only a matter of time before corporate spending recovers, and this morning’s GDP data suggest that that will happen soon, or may even have already begun.
GDP rose by a much healthier than expected 2.6% in the third quarter, breaking the run of two quarters of contraction so far this year. That is quite a turnaround, and it supports the contention that those two consecutive negative prints didn’t constitute a recession without some consequent weakening in the labor market. Whether you call it a recession, a “mini-recession,” a wobble, or whatever, the GDP bounced back strongly last quarter.
Even more encouraging for markets, and most likely the real cause of some of the market strength we are seeing this morning so far, is the Personal Consumption Expenditure (PCE) Price Index, which rose by 4.2%, down from 7.3% in Q2. The PCE index is the Fed’s preferred measure of inflation, so a big reduction in the rate of increase in the index hints at a pause in rate hikes before too long.
The evidence of the data is increasingly pointing towards a soft landing; at the very least it supports the idea that stocks could rally from here as the year ends. There may be some continued weakness in tech and social media stocks in particular, but even those will turn around eventually as business activity resumes to reflect the reality of minimal recessionary impact on the consumer. Meanwhile, strength in consumer-facing and industrial businesses will support the market. Overall, unless the Fed messes it up by “sticking to the plan” even though circumstances have changed, that means that most people will likely see increases in their 401ks and stock portfolios in Q4.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Image and article originally from www.nasdaq.com. Read the original article here.