Last week, we got a slew of new evidence that the U.S. economy has decelerated in recent months from last fall’s strong growth.
Fourth-quarter gross domestic product (GDP) growth and personal consumption were revised down, and durable goods orders fell for a second consecutive month for the first time since 2011. Meanwhile, a key leading indicator – the 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 numbers, 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 and a long-term trend of slow income growth.