Part of the weakness can be attributed to the slow pace of the labor market recovery, but longer-term secular factors are also at work. These include technological innovation, global wage competition, and a mismatch between workforce skills and available work. In the absence of some acceleration in wage growth, retail sales and household consumption will remain constrained, and since consumer spending accounts for close to 70% of U.S. economic growth, constrained consumption will continue to act as a drag on the overall economy.
So what does this mean for investors? There are a few implications.
- Be less afraid of long-term bonds. Soft economic growth means that while rates are likely to rise as the Fed continues to taper, the rise will be modest. Under this scenario, long-term bonds are unlikely to be as vulnerable as they were back in 2013.
- Remain cautious on segments of the market geared to consumption. So far this year, both consumer staples and discretionary stocks have trailed the broader market.
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog and you can find more of his posts here.
Sources: Bloomberg, BlackRock research