Can economic growth tailwinds outweigh higher interest rates?
Month-over-month retail sales for March topped economist expectations at 0.7%, with February figures revised higher to 0.9% (they previously sat at 0.6%). This means retail spending has averaged 2.8% annually over the past three months – a sharp trend change as shown in the chart below.
This spending news has important implications for economic growth and inflation alike. If consumers continue to spend money – it can help support economic growth. However, if they spend too much – prices might go up putting more upward pressure on inflation.
With prices going up faster than expected and GDP growth blowing past expectations for six quarters in a row, we would expect this hot consumer spending data to put even more upward pressure on interest rates.
Annualized Month-Over-Month Inflation and Retail Sales
Source: Bloomberg, calculations by Horizon Investments, as of 4/15/2024.
What’s behind the recent rise in rates is relevant to investors as well. Higher rates due to faster economic growth can support equity markets through earnings growth – and we believe this year’s rise in broad equity markets seems well supported through that lens. However, under the hood, rates have mattered for asset allocation decisions recently within equities as large-cap and growth allocations have meaningfully outpaced more rate-sensitive value and small-cap exposures.
As we head into the bulk of earnings season, we expect this split between outperformers and underperformers to grow as investors reprice stocks after the rise in earnings expectations. If the market’s heightened sensitivity to this data continues, we believe an actively managed allocation strategy may seize opportunities a passive, index-based approach might overlook.
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