The reason the stock market pulled back in May is two fold.
First, the perception that economic growth was decelerating in the U.S. and around the world. Now, please don’t hit the panic button like the folks on TV are telling you to do. Instead, let’s take a closer look at the data and what it means, especially considering that the real strength of the U.S. economy remains robust consumer spending.
The Commerce Department recently announced that first-quarter GDP decelerated from the fourth-quarter 3% pace, slowing down to 1.9% growth according to its latest GDP estimate. This was largely because businesses restocked shelves at a moderate pace and because government spending declined sharply.
But consumer spending accounted for the lion’s share of that GDP growth—in fact, it accelerated to an annual rate of 2.7%, its highest level since the fourth quarter of 2010 and a marked acceleration from 2.1% in the fourth quarter.
The primary reason why economic growth in the first quarter decelerated was because that government is shrinking. But as long as the consumer is still spending, our investment strategy will lead the way.
More support came in the form of solid retail sales in May. Sales at major chain stores posted a 3.9% increase year-on-year, above analyst expectations of a 3.6% gain, as consumers opened their wallets to update their summer wardrobes.
In addition, the outlook for the future looks strong as consumer confidence remains surprisingly high. The University of Michigan/Reuters reported that May consumer confidence rose to 79.3, up from 76.4 in April. And while the Conference Board’s May index dipped a bit more than expected, this was largely due to the stock market pullback in May and was offset by cheaper gas prices.
And we can thank the dysfunction of Europe — the second reason behind the recent market volatility — for those lower gas prices. In fact, this is the main impact that events in Europe have here in the U.S. As the euro stumbles to a 22-month low, the dollar is rallying. This puts downward pressure on crude oil and other commodity prices. So thanks to Greece, the prices at the pump should continue to fall, and inflationary concerns have been virtually eliminated.
While the problems in Europe look set to continue to provide some additional volatility moving forward for the market, the fact is that financial markets are now increasingly expecting Greece to exit the E.U., so if and when this happens, it should not have an adverse long-term effect reaction other than on financial stocks, especially eurozone banks. In addition, the volatility around the world means that the Fed is going to leave interest rates at their current record lows.
Get Used to Low Interest Rates, Greenspan
While the International Monetary Fund and the European Central Bank are considering further quantitative easing over in Europe, here in the U.S. the Fed is signaling that it may just rest easy for a while and take a bit more of a hands-off approach—not goosing the markets through QE3 but also not raising interest rates anytime soon.
Former Fed Chairman Alan Greenspan went on
CNBC and said that rates could go up, offering no other proof then a hunch that it “could” happen.
But until there’s something concrete, I expect Treasuries, savings accounts and CDs are going to remain at record lows. This is bad for savers who don’t trust the market and are cringing at the 0.25% interest rate in their bank accounts, but it’s great for investors—the best stocks right now are those with high dividend yields, an aggressive stock buyback program and strong sales and earnings.
As investors continue to wake up and realize that the Fed is keeping interest rates where they are, high-dividend stocks have attracted big buying pressure.
