Stock trading on Wednesday weakened after data indicated strong consumer spending in October. The strong U.S. economy, combined with persistent inflation weakens chances of the Fed cutting interest rates. At best, the Fed will cut rates by 25 basis points in December or in January 2025.
In October, the core PCE price index increased slightly by 0.2%. This is below the consensus of a 0.3% increase. For the 12-month period, the inflation rate increased to 2.3%, compared to 2.1%. More importantly, the report indicated a 0.6% increase in personal income, double expectations estimated by economists. Strong disposable income adds to inflationary pressures. The more consumers spend, the more it stimulates the economy.
When Trump takes office in 2025, stock markets will need to price in the negative impact of tariffs. U.S. consumers will end up paying for the bulk of the tariffs. Furthermore, markets expect the government to continue spending heavily. Despite initiatives to find efficiency in the government, deficits will rise. Investors may buy bank stocks like B of A (BAC) or JPMorgan (JPM) while avoiding long-term bonds (TLT).
Banks will thrive when the U.S. economy remains strong.
The Nasdaq (QQQ) dropped by 0.59%, while the S&P 500 (SPY) fell by 0.38% on the day. Still, more stocks traded at new highs (85.5%) than new lows (14.5%).