We’ll have to wait to see if consumers come through and actually spend more this year.

If they do, it would be consistent with the years-long narrative of record consumer spending. Just this past Friday, we learned retail sales in October rose to a record $718.9 billion.

All this spending has been supported by healthy household balance sheets and real income growth.

Household finances are in good shape

Sure, households aren’t as flush as they were earlier in the economic recovery — but they remain strong relative to history.

This is best reflected by the debt-to-income ratio, which remains at historically low levels even as aggregate debt has been rising.

“Although household balances continue to rise in nominal terms, growth in income has outpaced debt,” wrote Donghoon Lee, Economic Research Advisor at the New York Fed.

It’s a reminder to take headlines like “US Household Debt Rises to $17.94 Trillion: N.Y. Fed" and “Credit card debt hits record $1.17 trillion“ with caution because they lack the context you need to avoid drawing the wrong conclusions. Better headlines read like “Household debt is up, but Americans are in a better spot to pay it" and “NY Fed says household debt up in third quarter as rising incomes ease debt burden."

And in case you’re wondering: Households have a long way to go before they max out their credit cards.

Yes, debt delinquencies have been rising. It’s an economic warning sign to keep an eye on. But for now, they can be characterized as normalizing.

“Aggregate delinquency rates edged up from the previous quarter, with 3.5% of outstanding debt in some stage of delinquency,“ New York Fed researchers noted. That’s significantly below Q4 2019 levels.

Also, it’s notable that wage growth has outpaced inflation for 18 months.

“This is how most Americans will ultimately be able to get ahead,” The Washington Post’s Heather Long wrote. “Prices won't go down, but wages will go up enough to offset the higher prices.”

We’re also on a 46-month streak of net job creation in America. When more people have jobs, more people have money to spend.

With a new political party moving into the White House next year, we can expected an upheaval in consumer sentiment.

But as we’ve learned in recent years, people won’t put their lives on hold just because sentiment is poor. If they have money, they will spend it.

Review of the macro crosscurrents

There were a few notable data points and macroeconomic developments from last week to consider:

Shopping rises to new record level. Retail sales increased 0.4% in October to a record $718.9 billion.

Strength was broad with growth in electronics, cars and parts, restaurants and bars, building materials, and online shopping.

Card spending data is holding up. From JPMorgan: “As of 08 Nov 2024, our Chase Consumer Card spending data (unadjusted) was 0.8% above the same day last year. Based on the Chase Consumer Card data through 08 Nov 2024, our estimate of the US Census November control measure of retail sales m/m is 0.35%.”

Unemployment claims tick lower. Initial claims for unemployment benefits declined to 217,000 during the week ending November 9, down from 221,000 the week prior. This metric continues to be at levels historically associated with economic growth.

Inflation remains cool. The Consumer Price Index (CPI) in October was up 2.6% from a year ago, up from the 2.4% rate in September. This remains near February 2021 lows. Adjusted for food and energy prices, core CPI was up 3.3%, unchanged from the prior month’s level.

On a month-over-month basis, CPI was up 0.2%. Core CPI increased by 0.3%.

If you annualize the six-month trend in the monthly figures — a reflection of the short-term trend in prices — core CPI climbed 2.6%.

Inflation expectations remain cool. From the New York Fed’s October Survey of Consumer Expectations: “Median inflation expectations fell at all three horizons in October. One-year-ahead inflation expectations declined by 0.1 percentage point to 2.9%, three-year-ahead inflation expectations declined by 0.2 percentage point to 2.5%, and five-year-ahead inflation expectations declined by 0.1 percentage point to 2.8%.”

However, the introduction of tariffs as proposed by president-elect Donald Trump would be inflationary. For more, read: Wall Street agrees: Tariffs are bad

Gas prices tick lower. From AAA: “The national average for a gallon of gas is now less than a dime away from dipping below $3 for the first time since May of 2021. But the possible formation of a new hurricane in the Gulf of Mexico could delay or even temporarily reverse the decline in pump prices. Since last week, the national average dropped two cents to $3.08.”

Mortgage rates tick lower. According to Freddie Mac, the average 30-year fixed-rate mortgage declined to 6.78%, down from 6.79% last week. From Freddie Mac: “After a six-week climb, rates have leveled off, but overall affordability continues to be an issue for potential homebuyers. Freddie Mac’s latest research shows that mortgage payments compared to rents on the same homes are elevated relative to most of the last three decades.”

There are 147 million housing units in the U.S., of which 86.6 million are owner-occupied and 34 million of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates.

Importantly, the more tangible “hard” components of the index continue to hold up much better than the more sentiment-oriented “soft” components.

Industrial activity ticks lower. Industrial production activity in October fell 0.3% from the prior month. Manufacturing output fell 0.5%. From the Federal Reserve: “A strike at a major producer of civilian aircraft held down total IP growth by an estimated 0.3 percentage point in September and 0.2 percentage point in October. Hurricane Milton and the lingering effects of Hurricane Helene together reduced October IP growth 0.1 percentage point.“

This is the stuff pros are worried about. According to BofA’s November Global Fund Manager Survey: “On tail risks… 32% of November FMS investors view higher inflation as the #1 biggest 'tail risk' (up from 26% in October). Concerns over geopolitical conflict took the 2nd place spot this month at 21% (down from 33% last month).”

Offices remain relatively empty. From Kastle Systems: “Peak day office occupancy on Tuesday dropped more than five full points from the prior week to 57% as many workers went to the polls on Election Day. Occupancy also declined on Wednesday compared to the previous week, dropping 3.6 points to 57.8%. Washington, DC saw the largest decrease with its peak occupancy day dropping more than nine points to 50% on Thursday. The average low was on Friday at 32.6%, down six tenths of a point from last week.“

Near-term GDP growth estimates remain positive. The Atlanta Fed’s GDPNow model sees real GDP growth climbing at a 2.5% rate in Q4.

Putting it all together

The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.

Demand for goods and services is positive, and the economy continues to grow. At the same time, economic growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like excess job openings have faded.

To be clear: The economy remains very healthy, supported by strong consumer and business balance sheets. Job creation remains positive. And the Federal Reserve — having resolved the inflation crisis — has shifted its focus toward supporting the labor market.

We are in an odd period given that the hard economic data has decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continue to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.

Analysts expect the U.S. stock market could outperform the U.S. economy, thanks largely due to positive operating leverage. Since the pandemic, companies have adjusted their cost structures aggressively. This has come with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.

Of course, this does not mean we should get complacent. There will always be risks to worry about — such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, cyber attacks, etc. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.

There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect to experience as they build wealth in the markets. Always keep your stock market seat belts fastened.

For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t be able to overcome over time. The long game remains undefeated, and it’s a streak long-term investors can expect to continue.

A version of this story first appeared on TKer.co