Kristina Hooper, CFP®, CAIA, CIMA®, is US head of investment and client strategies for Allianz Global Investors. 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.
Nothing could stop the stock market from extending its winning streak last week. Surprisingly sluggish retail sales and renewed debate over the consequences of the Fed’s asset-purchase plan was not enough to keep stocks from setting new records.
Retail sales fell 0.4% in March, short of economists’ forecast for a flat month. While the results were not terrible, they do raise the question of whether the drop-off in sales is another seasonal soft spot—like we’ve seen the past two summers—or if it is more structural in nature, resulting from the payroll-tax cuts rolling off in January and the government sequester kicking in.
The disappointing retail sales number syncs with recent measures of consumer confidence. The Thomson-Reuters/University of Michigan consumer sentiment index's preliminary April reading came in at 72.3, well below expectations and down from the final March reading of 78.6. Not only have consumers expressed less conviction on current conditions, but also they’ve expressed more pessimism in their outlook.
Near-term inflation expectations also fell. But they remain high—higher than the Fed’s outlook. Inflation expectations for the next five to 10 years remain at 2.8%. However, the one-year inflation expectations reading for early April came in at 3.0%. While it’s below the previous reading of 3.2% at the end of March, it remains above the Fed’s target for maintaining its asset purchase plan.
The release of the FOMC minutes added to the negative news, revealing growing interest in taking away at least a portion of the punch bowl later this year. More specifically, the minutes included calls for reducing the number of asset purchases as labor-market conditions improve. FOMC members cited concerns about the possible negative implications of the asset-purchase plan including instability in the financial system, a sudden rise in interest rates and a sudden increase in inflation.
But even the release of the minutes didn’t shake investors’ confidence. They likely reasoned that the Fed’s meeting took place before the disappointing March non-farm payrolls data were released. And they probably recognize that Chairman Ben Bernanke and Vice Chair Janet Yellen both believe that a job-market recovery is a long way off and that, despite all the talk, it’s unlikely that the Fed will taper asset purchases any time soon.
More importantly, perhaps investors have decided to take a long-term perspective and recognize the importance of having exposure to stocks in order to meet their goals. They likely understand that developed countries are in the process of a massive public deleveraging in which they are using aggressive and unconventional monetary policies to hasten the erosion of debt. And given consumers’ outlook on inflation, investors seemingly recognize the threat it poses and understand the damage that even moderate inflation can inflict on personal savings. Given this backdrop, equities continue to be an attractive asset class for investors.
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