Last week, we got a slew of new evidence that the U.S. economy
has decelerated in recent months from last fall's strong
Fourth-quarter GDP growth and personal consumption
were revised down
durable goods orders fell for a second
for the first time since 2011. Meanwhile,
key leading indicator
Chicago Fed National Activity Index (CFNAI)
fell to a six-month low
, suggesting a further slowdown in U.S. economic growth.
Yet last week, U.S. stocks rallied into record territory,
equity market valuations climbed, credit spreads tightened
and volatility returned to low levels not seen since January.
Why the disconnect between market performance and economic
reports? As I write in
my new weekly commentary
, investors seem to be ignoring the negative economic news and
remaining optimistic that the Fed will keep policy accommodative
and that the economy will rebound once the weather improves.
In other words, if we needed any more evidence that many
economists and investors alike are
blaming the weather for recent weak economic
, we got it last week.
However, as I wrote last week, while weather is certainly
responsible for at least some of the recent economic slowdown,
there are other factors to blame, including the
still soft job market
a long-term trend of slow income growth
To be sure, it's not as if the economy is falling off a cliff;
rather, it's simply growing more slowly than many had hoped. Yet
despite the weakness, equity market valuations have been
climbing. U.S. large caps are now trading at more than 17x
trailing earnings, close to the multi-year high recorded late
Meanwhile, beyond stocks, spreads on U.S. high yield bonds
have tightened considerably, meaning investors are willing to
accept ever smaller yield premiums for the additional risk of
holding high yield debt. In short, for now, investors seem to be
making an implicit bet that the spate of weak data will be
temporary and that the economy will resume its acceleration when
the spring thaw hits.
While this may be a reasonable bet, if the economic data
doesn't start to improve in coming months or if the geopolitical
situation worsens, stocks and other risky assets may become more
vulnerable and face a tough spring ahead.
Source: Bloomberg, BlackRock research
Russ Koesterich, CFA, is the Chief Investment Strategist
for BlackRock and iShares Chief Global Investment Strategist.
He is a regular contributor to
and you can find more of his posts