US Reporter


Consumer Confidence Rose, Stocks Are Very Resilient, 2023 A Year of Recovery?

Inflation has been the most discussed topic in financial circles for much of 2022. While the Federal Reserve had earlier given projections of transient inflation, there was a change of tune midway. Faced with the realities of sticky inflation, the Fed began monetary policy tightening with the hope that it would bring inflation back to the targeted levels.

Fed watchers have been particularly keen on the interest rates vs. stock market interplay. Traditionally, rising interest rates have been associated with falling stock prices. However, there have been instances this year where rates are rising, and still, stock prices are not coming down. Amidst moderating inflation pressures and a stronger-than-expected labor market, expectations for a stronger 2023 are high.

Retreating Inflation Hit Record Lows

Energy prices have been the leading inflation driver for almost all the inflation runs, including much of 2022. However, the month of December saw gasoline prices falling. The impact of this on inflation has raised consumer confidence to a level not seen since April 2022.

Inflation has a direct squeeze on household finances forcing consumers to rearrange their budgets with priorities shifting to necessities and small ticket items. Whenever consumer demand falls due to rising prices or falling consumer confidence, stock prices also fall.

The basic explanation for this is that consumer demand directly impacts company production decisions. Falling demand means companies cut their production targets and reduce their inventory levels. In turn, these adjustments affect revenue and profit forecasts and consequently share prices.

Business and Labor Market Conditions

Consumers were upbeat about the business and labor market prospects going forward. Looking at the present situation index that increased from 138.3 in November to 147.2 in December, the message is clear that consumers are looking forward to a resilient 2023.

Another metric that relayed similar consumer signals is the expectations index. This index looks at the short-term outlook of the labor market, business conditions, and income projections. This metric rose from 76.7 in November to 82.4 in December.

The actions of the Fed and the persistent inflation had stoked fears of a recession going into 2023. However, looking at the performance of the indices, those fears seem to be ebbing away. The view of the economy and jobs seems favorable, and this will have an impact on the projected performance of the equities market.

Mixed Signals in The Housing Market

In line with the rising sentiments, demand for vacations seems to be picking up well. December saw vacation intentions rise, with many Americans looking for personal and family getaways.

Despite the desire of Americans to travel and go on vacation, the housing market performance is still showing some signs of cautiousness. For instance, home purchase plans cooled down and so were planned purchases of big-ticket items. This phenomenon points to a retreat in consumer spending at least in the short term, caused by a rise in interest rates.

Mortgage and consumer loan rates have been rising thanks to the Fed’s monetary policy tightening. With every rise in the base rate, loan rates also rise in a lockstep sort of fashion. The rise in the cost of credit makes big-ticket items, including housing, hard to afford. The 0.6% fall in retail sales in the U.S. for November, the biggest in the year, was a clear sign that consumer spending was weakening.

According to experts, the shift from big-ticket items to services will define the consumer preference trend for much of 2023. The impact of interest rate hikes and inflation is also likely to trigger a loss in consumer confidence in the near term though this is likely to improve later in the year.


Despite the headwinds from rising interest rate hikes and inflation, there seems to be a silver lining not far down the road. Consumer confidence measured by indices such as the present situation index and the expectations index showed significant improvements. That being said, the near-term outlook punctuated by factors such as labor market tightness may temporarily hold up confidence. However, heading into 2023, the stock market will most likely record significant gains as the economy charts the path to recovery.

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