Outlook The wealth effect is a behavioral finance theory that suggests when household wealth increases, consumers' sense of financial security rises - leading to an increase in spending. Conversely, when asset values fall, such as during a stock market decline, people often cut back on spending, which may put a drag on economic growth. Currently, the level of stock ownership in US households is at near record highs when compared to either disposable income or compared to total household assets).1 As a result, the recent decline in stock prices, if the theory holds, puts consumer spending at risk. However, there are a few missing ingredients that would give us greater concern. Notably, we do not see years of misbehavior such as runaway spending or borrowing in the financial, housing, or business sectors - and consumers have reasonable balance sheets in our opinion. The biggest exception, and possible risk to our relatively positive view, is the heavy concentration of the top stocks in the market. For example, the "Magnificent 7" stocks nearly reached one-third of the total value of the stock market.2 The recent (and possibly ongoing) pullback in the stock market is putting a dent in the level of Magnificent 7 concentration and may have some impact on spending. However, given the decent economic conditions in our view, we remain constructive on the economy. The stock market pullback may very well prove to be an opportunity. . . . The U.S. equity market closed out a volatile week that started with an advance and ended with a selloff. Tariffs remained at the forefront of conversations and news headlines in anticipation of April 2nd, a day in which President Trump has called “Liberation Day.” The president is expected to announce his plan for reciprocal duties aimed at countries that impose tariffs on U.S. imports, along with a 25% tariff on auto imports. Uncertainty surrounding tariffs has weighed on equities, along with a hotter-than-expected inflation reading which sent the market down on Friday. For the week, the S&P 500 fell -1.5%, the Dow Jones Industrial retreated -1.0%, and the tech-heavy Nasdaq Composite slid -2.6%. Economic Growth U.S. economic growth has remained solid as consumer spending (which comprises nearly 70 percent of GDP) continued to boost the economy higher in 2024. Gross domestic product (GDP) tracked at a healthy 2.4% pace in the fourth quarter, after an upgrade to the final growth estimate (previously 2.3%). Full-year GDP accelerated 2.8% compared to 2.9% in 2023, both historically above average. The revision was driven by a decline in imports, which is subtracted from GDP. Consistent with the previous estimate, consumer spending and government expenditures drove much of the expansion, slightly offset by a drop in private investment. The GDP report shows how influential strong consumers had been throughout 2024 in driving the broader economy higher despite elevated prices. However, uncertainty regarding the continuation of a strong consumer has risen. Many fear the proposed tariffs could impact business plans and potentially curb consumer spending, which may lead to short-term economic headwinds. Inflation In addition to growth revisions, the markets also received an update on a key inflation reading. The personal consumption expenditure price index (PCE), an indicator of the average change in price for all domestic personal consumption and the Federal Reserve’s preferred inflation gauge, was also released in the prior week showing core pricing pressures came in slightly more elevated than expected. The headline gauge increased by 0.3% for the month, bringing the annual inflation rate to 2.5%, both matched expectations. Core PCE, which excludes volatile categories of food and energy, rose by 0.4% for the month, bringing the annual core inflation rate to 2.8%. The core data came in a bit hotter than the 0.3% monthly and 2.7% year-over-year expected readings. The report also outlined changes to income and spending. Personal income rose sharply by 0.8%, double expectations for a 0.4% increase and up from the 0.7% rise in January. Some of the higher income transferred into increased spending, which saw a rise of 0.4%, although it was less than the 0.5% forecast. The remaining income most likely went into savings, as the personal savings rate accelerated to 4.6%. | 
