Latest weekly commentary from Russ Koesterich, BlackRock's Chief Investment Strategist.
Stocks Climb to Yet More Record Highs
From a markets perspective, the main themes last week were echoes of the previous one: Federal Reserve Chairman Ben Bernanke made statements indicating tighter monetary policy wasn't coming as quickly as many feared; stocks rose to new record highs; and Treasury yields declined (as prices rose). The fact that these market moves occurred despite a string of relatively weak economic data confirms that investors remain focused on (and perhaps obsessed with) any hint of what the Fed will do next .
Weak Income Growth Continues to Be a Drag on the Economy
Although one of the most visible measures of US economic health-jobs growth-continues to be decent, last week's data releases confirmed that the economic recovery remains fragile.
First, last week's data included the Conference Board's index of leading indicators, which was flat for June (below most economists' expectations). Second, both housing starts and housing permits fell last month, suggesting perhaps that the increase in mortgage rates that has occurred over the past couple of months is having a negative impact on the housing market. Third, and perhaps most significantly, retail sales for June were disappointing. The headline number was respectable, but most of the gains were concentrated in auto sales. Outside of autos and gasoline, retail sales actually dropped by 0.1%, the first decline in a year.
The persistent weakness in the economic data begs the question: If jobs are still being created, why isn't the overall economy improving more quickly? In our view, the problem may well be found in the actual nature of the jobs being created-many are not paying very much and many are part-time jobs. In turn, many of those who are holding part-time jobs are continuing to look for full-time work. In fact, the total percentage of Americans who are either out of work or are looking for full-time employment (a statistic known as the U6 unemployment rate) climbed to 14.3% in June, up from 13.8% in May, and quite a bit higher than the official unemployment rate of 7.6%.
All of this is conspiring to hold down income growth for most households, and without growth in incomes, it is extremely difficult to imagine how the broader economy will be able to shift into a higher gear . The latest data shows that, on an inflation-adjusted basis, disposable income is up only 1.1% on an annual basis, an incredibly weak number by historical standards. Over the last 50 years, annual income growth has averaged over 3%. Current income growth also compares poorly to the average growth over the past three years of 1.7%.
Stocks Should See More Gains, but Avoid Consumer Sectors
To us, this backdrop suggests that economic growth is likely to remain weak. We will soon see the first readings of second quarter gross domestic product growth; current estimates are calling for growth of 1.6%. This is slower than the 1.8% reading seen in the first quarter and remains below the trend of the last several years. Should these expectations come to pass, it would mark the third consecutive quarter of below-2% growth.
None of this, however, means that gains in stock markets have to end. On the contrary, we continue to expect equities will see price gains over the next six to twelve months . A combination of slow growth, low inflation, and relatively low interest rates should allow for stocks to move higher over the next 12 months. We would point out, however, that there is at least one area of the market that deserves some caution: US consumer-related stocks (such as restaurants and retailers). This area of the market is demonstrating noticeably more expensive valuations compared to the broader market-premiums that are tough to justify with consumer spending levels depressed and likely to remain that way. With consumers still struggling, with income growth weak and with spending being held back, consumer-related stocks generally look unattractive .
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