Spending's not ending

September retail sales rose 0.8%, but this was mostly driven by gasoline prices. Excluding gas, consumer spending increased by only 0.2%. This highlights a widening gap: higher earners' assets are growing, supporting their spending, while lower-income households face declining real wages and rising essential costs.

The key variable for future spending and inflation remains energy prices, heavily influenced by geopolitical events. A prolonged conflict could mean persistent inflation, favoring value stocks and ultra-short duration bonds. Conversely, a cease-fire might allow inflation to cool, potentially leading to a Fed pause and supporting global quality stocks and short-duration bonds.

Our outlook presents two scenarios. A "sticky soft landing" suggests moderating inflation and positive but slowing growth, favoring diversified equities with a quality tilt and short-duration investment-grade bonds. An "inflation persistence" scenario, or stagflation lite, sees weak growth and sticky inflation, where large-cap quality stocks with pricing power and ultra-short/floating-rate fixed income may perform best. Uncertainty persists regarding the duration of geopolitical tensions and their impact on energy markets.