The Weekend Edition is pulled from the daily Stansberry Digest.

The Fed Is Watching America's 'Consumer Engine'

By Corey McLaughlin

It feels like a recession...

Regular readers have heard us say and remind you before that consumer spending is tied to roughly 70% of U.S. economic activity. Americans usually like to spend money, and that keeps the U.S. economic engine humming.

But that motor may need some work soon...

More and more Americans are spending less and less money. Kevin Sanford of the Stansberry NewsWire shared these year-over-year comparisons on Monday...

According to the latest Consumer Checkpoint report from Bank of America, credit- and debit-card spending in March rose at the smallest rate in more than two years. Check it out...

The above chart shows us that households are quickly approaching negative levels of spending growth due to the higher cost of living.

This chart is enough to tell me that we're increasingly seeing the "long and variable lag" of the Federal Reserve's rate hikes... and the consequences of the trillions of dollars in stimulus and other factors that led to 40-year-high inflation.

Bank of America also showed that after-tax wages and salaries saw around 2% annual growth in March. That's a dramatic decline from the almost 8% growth we saw at the height of inflation in the summer of 2022.

Making less will lead to spending less.

Things could go three ways... U.S. consumer spending could continue this two-year trend of declining growth and head into negative territory soon – a hit-you-over-the-head signal of economic contraction. Or spending could churn sideways, or even somehow turn higher.

We're seeing signs that the first option is the most likely...

Last Friday, the U.S. Department of Commerce published its retail sales figures for March. They showed that spending fell for the second straight month, and nominal retail sales only grew 1.5% year over year. That was the lowest growth rate since May 2020.

And maybe more of a relevant indicator is "real" retail sales numbers, which account for inflation. They were down 3.3% from a year ago. As Kevin pointed out...

[That's] a 249% decline compared with the long-term average annual growth of 2.2%. Take a look...

The bottom line is that consumers are pulling back. They believe we're already in a recession.

Of course, we try to put "feelings" in the proper perspective when it comes to buying and selling stocks or making trades.

But accounting for consumer sentiment and its influence on the economy is a valuable exercise. Their collective feeling can be a self-fulfilling prophecy... It shows up in spending patterns... corporate earnings... and on and on...

What's the next shoe to drop? Businesses will feel this impact on their bottom lines. That will translate into declining wage growth, which we're already seeing... along with fewer job openings and even layoffs.

Some companies, like the "zombies" that can't afford to pay the interest on their debt today, could very well go out of business completely.

Once these factors push up the unemployment rate, the standard-bearers at the National Bureau of Economic Research will declare an "official" recession... many, many months after it really began.

The question now is how much more "expensive" money will get...

The uncertainty around the pace of inflation is gone from the market now. It keeps slowing, though how quickly or slowly remains in question.

What we do know is that the Fed will have an influence on the answer, based on its biggest tool to fight inflation. That is interest rates... specifically, the federal-funds rate. With this tool, it can set a "price of money" that applies most directly to banks, then filters throughout rate-sensitive sectors of the economy.

It also hits everyday Americans through interest payments on things like car loans or home mortgages.

Will the Fed see these signs of slowing spending and still raise its benchmark lending rate by another 25 basis points at its next policy meeting early next month, like it has indicated it will?

Or will it stop hiking altogether before getting its rate to the goal of around 5%, which it reiterated just last month?

Or will it keep raising rates beyond that target because inflation hasn't come down enough and the jobs market remains "strong"?

One tea leaf suggests the "25 basis point and done" option...

At least, that's the takeaway from Treasury Secretary (and former Fed Chair) Janet Yellen. She's already stumping for a pause in rate hikes and rate cuts to come soon...

Of course, she works for the White House and got the prospect of inflation wrong in 2021. Plus, in 2017 while serving as Fed chair, Yellen said she didn't believe another financial crisis would happen "in our lifetimes." So consider the source. But let's not pretend that politics doesn't enter the brains of the Fed governors.

Yellen said in a CNN interview last weekend that in the wake of the Silicon Valley Bank failure, other banks are likely to become more cautious and tighten lending...

According to Yellen, this "could be a substitute for further interest rate hikes that the Fed needs to make."

Current Fed Chair Jerome Powell brought up the same idea at his last public appearance before reporters. He said that when banks tighten lending standards, it will slow the economy more than the Fed anticipated. When I heard this last month, to me, it was Powell setting up a reason to pause rate hikes.

Reading Yellen's comments gave me the same feeling...

Of course, since the banking crisis of March, things have been relatively calm (we haven't seen a one-day, billions-of-dollars bank run). This may pull the Fed back to "inflation fighting no matter what" mode... especially if inflation numbers surprise or the job market remains stronger than expected.

But so far, the markets are behaving like a Fed pause is coming...

Bond traders are betting with nearly 90% odds on a 25-basis-point hike in May and then 67% odds on the fed-funds rate range holding between 5% and 5.25% in June. They expect rate cuts by the end of the year.

And the benchmark S&P 500 Index, which was flat since the start of the year as recently as mid-March, is now up 8% for 2023... and up 15% since its most recent low back in October.

The index is still 14% lower than its previous all-time high at the start of 2022. So it's hard to declare we're in a new bull market. But the U.S. benchmark for stocks has been making higher lows – and is presently trying to make new higher highs – since October. That trend is significant.

Whatever happens, here's a good idea...

Own shares of high-quality businesses.

It might sound too simple... But it's amazing how many people don't believe in this idea or ignore what's right in front of them.

Own companies that generate gobs of free cash flow, sell products or services that people will buy no matter what, and have a proven record of rewarding shareholders through a variety of economic environments.

I was looking at Hershey (HSY) recently...

We last mentioned the chocolate and snack company in some depth in the October 31, 2022 Digest, noting via DailyWealth Trader editor Chris Igou that shares were up 24% year to date in 2022 while the S&P 500 was down nearly 20%. As I wrote then...

This "boring," essentially inflation-proof business has been outperforming the broader market significantly all year...

It's the same story now...

In the market's recent bullish run to start the year, this stock is also outperforming on the way up. Hershey has climbed nearly 15% since the start of the year including its wealth-compounding dividend payouts – nearly double the S&P 500.

Hershey is the kind of boring company you always want to own, for the very reasons we've seen over the past year-plus. Chocolate and other snacks (like Hershey's kid-favorite Pirate's Booty) may not seem exciting. But they have staying power, which means Hershey can keep generating huge profits... and growing its business.

On Monday, Hershey announced plans to buy an industry leader in popcorn production and co-packing, which already is the co-manufacturer of Hershey's SkinnyPop popcorn. Jason Kashman, the CEO of the formerly family-owned and -operated Weaver Popcorn company, said...

Hershey is acquiring two best-in-class popcorn manufacturing operations that will enable continued growth in volume and quality, with teams at each location that have an unrivaled expertise.

This type of stock is always worth owning...

No matter what you think about whether we're in a recession or not, the direction interest rates might take, or any other risk today, these are the stocks you want to hold to protect and grow wealth over the long run.

Good investing,

Corey McLaughlin

Editor's note: Our colleague Dr. David Eifrig just shared why high inflation and high interest rates don't have to crush your savings. In fact, he says you can actually turn them in your favor – because right now, these forces are serving up the juiciest returns in quality, low-risk stocks that he has seen in many, many years. It's a chance to start collecting cash yields of 14% or more, while positioning yourself for hundreds-of-percent capital gains.

His discussion is a must-watch if you're looking to protect and build your long-term wealth in this uncertain market... Find out more before this video goes offline.

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