Kristina Hooper, CFP®, CIMA® is head of portfolio strategies for Allianz Global Investors Distributors LLC. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.
The stock market has quietly put together an impressive winning streak.
Last week, stocks rose despite low trading volume and conflicting economic data. Investors were mildly cheered by news that the U.S. trade deficit narrowed for the third straight month but were disappointed by export data from China, which showed a big drop in demand from European Union countries.
Meanwhile, reports from the Federal Reserve on consumer credit and bank lending were mixed, but offered some positive takeaways. It seems that with stubbornly high unemployment, investors are anticipating QE3
. While trading volume remains low, the hope for further government stimulus has helped stocks stage a "stealth rally," up roughly 8% in 10 weeks.
Pockets of Strength
Consumer credit for June came in at $6.5 billion versus consensus expectations of $10.3 billion. The data, which showed the slowest rate of credit growth since October at 3% annualized, disappointed many investors. However, there were some silver linings in the report that should not be overlooked. First, revolving credit, which includes credit-card spending, dropped $3.7 billion, or 5.1%, on an annualized basis. Revolving credit had spiked in May and there were concerns that it was a sign consumers were engaged in distressed borrowing to cover living expenses. Hopefully, the combination of a downward revision to last month’s revolving credit number and this month’s low revolving credit number allay such fears.
In addition, non-revolving loans, such as those used to pay for education and autos, climbed $10.2 billion. Non-revolving credit’s increase is thought to be due, at least partly, to borrowers rushing to take out student loans before rates were supposed to go up July 1. But that didn’t happen. Lower student loan rates were extended another year. Non-revolving credit can be considered "personal cap ex" in that loans typically are geared toward longer-term investments can improve economic health over the longer term. While an increase in student loans might be viewed as a sign that more people are out of work and feel compelled to return to school, it is still a good investment for the future.
But perhaps most interesting was information the Fed provided about bank lending in its July 2012 senior loan officer opinion survey. The Fed’s poll confirmed economic data seen elsewhere, reporting gains in residential loan demand and weakness in consumer borrowing, especially credit cards. Demand on the business side for commercial and industrial loans and for commercial real estate has dipped slightly in the latest survey. The best news may be signs that lending standards are easing. "Domestic banks, on balance, continued to report having eased their lending standards across most loan types over the past three months," the Fed reported. In particular, consumer lending standards for car financing and credit card loans eased, while standards for other consumer borrowing were about unchanged, according to the Fed.
However, the key to a sustained economic recovery may be the broadening of banks' looser lending standards to consumers, whose spending comprises about 70% of GDP, on what is typically their largest debt: residential loans. We’ve already seen increased demand for residential loans as mortgage rates have fallen; but in order for many consumers to avail themselves of these very low rates, they will need banks to relax lending standards. While a growing number of consumers are benefiting from historically low interest rates—albeit a boon for the economy—it is hurting savers. Such low yields have spurred a new era of financial repression.
With QE3 likely in the offing and interest rates expected to be kept near historical lows until at least into 2014, it’s more important now than ever for investors—both institutional and individual—to have adequate exposure to income-producing risk assets in order to meet their objectives.
The "eight in 10" stealth stock rally as well as recent flows into emerging-market bonds may be early signals that investors understand the negative impact of low rates. And they’re finally doing what the Fed has virtually forced them to do: move out on the risk curve.
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