Why the consumer is ‘critical’ for investors to watch in 2023 as bear market ‘not yet complete’

The fate of the U.S. consumer is weighing on the outlook for markets in 2023. 

“The issue is that consumers are actually spending at a pace that is faster than their income growth, and have been for the last six or nine months,” said Bob Elliott, co-founder, chief executive officer and chief investment officer of Unlimited Funds, in a phone interview. 

They’re drawing down on savings, which peaked at around $2 trillion after piling up as a result of massive fiscal stimulus that came in response to the COVID-19 crisis, according to Elliott,  a former executive at macro hedge-fund firm Bridgewater Associates. Consumers probably are about halfway through that drawdown, he estimated, and “then it’s going to become more difficult for them to keep up their spending” pace.

“This bear market is well underway, but not yet complete,” Citi Global Wealth said in its outlook for 2023. “Historically, a new bull market has never begun before a recession has even started.”

But a recession might not happen as quickly as many stock and bond investors seem to fear, according to Elliott, who expects “recessionary dynamics” to emerge in the second half of 2023 as dried-up consumer savings then leads to a fall in spending. 

The “flood of money” into the bond market in recent weeks “would make a lot of sense if we were very close to a recession,” he said. “But we’re not close to a recession, based upon the labor market and consumer spending…

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