Why Consumer Savings Are Critical for Investors in 2023 as Bear Market 'Still Underway'

The fate of the U.S. consumer is weighing on the outlook for stock markets in 2023, according to several Wall Street analysts.

"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 of Unlimited Funds and a former executive at Bridgewater Associates.

While consumer savings peaked at around $2 trillion thanks to the massive fiscal stimulus given out by the federal government during the pandemic era, they are probably still about halfway through the drawdown, Elliott estimated. Therefore, a recession might not happen until the second half of 2023, as dried-up consumer savings might then lead to a fall in spending, Elliott said.

Jim Reid, Deutsche Bank's head of thematic research, also expects a recession in late 2023. "One of the reasons we've felt confident that the U.S. economy wouldn't slip into recession in 2022 and early 2023 — even though we've been convinced that it will by the end of 2023 — is the huge pool of excess savings and when they'll be eroded," Reid said in a note last week.

"The consumer remains supported by a historically enormous $1.2 trillion stock of excess savings as well as a strong labor market," Reid added, "If we're correct about a recession starting in the third quarter, then the entire stock will be depleted by the end of that quarter."

Stocks and bonds rallied recently after two consecutive softer-than-expected inflation readings, but the bear market might still be well underway before recession emerges in 2023, according to Citi Global Wealth. "Historically, a new bull market has never begun before a recession has even started," Citi said.