Highlights for This Week Include:

• Positive retail sales and industrial production readings support the healthy economy narrative with the Atlanta Fed’s GDPNow model calling for strong first quarter economic growth of 2.9%.
• Pullbacks of 5% - 10% are to be expected in any given year, especially after the strong run over the last five months, and so far, this pullback looks normal within the ongoing bull market. Important factors support a continued positive outlook for stocks, led by the potential for further better-than-expected profits.

Retail Sales and Industrial Production Support the Healthy Economy Narrative

Retail sales increased 0.7% in March, more than double the consensus estimate of 0.3%, and up 2.1% on a y/y trend basis. Additionally, the previous month was revised up to 0.9% from 0.6%, fully erasing the weather-related drop at the start of the year. This confirms the economy ended the first quarter with strong consumer demand, driven by continued job growth and positive wage growth. This resilient demand also helps explain the elevated inflation readings we have seen so far this year.

Industrial production continued to rebound in March, rising for a second consecutive month due to broad-based gains. Overall industrial production increased 0.4% with the manufacturing sector the main source of strength where activity rose 0.5% m/m (0.8% y/y), led by autos and high-tech equipment. The increase in manufacturing output, both from the prior month and from a year ago, is in line with the recent pickup in the closely watched ISM and S&P Global business surveys, all of which suggest that factory activity is improving.

The recent positive economic readings have the Atlanta Fed’s GDPNow model projecting first quarter economic growth of 2.9% while the Blue Chip consensus estimate now stands above 2.0% after starting the year below 1.0%.

Thoughts on Recent Market Pullback

With inflation remaining stubbornly above the Federal Reserve’s (Fed’s) 2.0% target, interest rate markets and the Fed itself are signaling a delay in the start to actual interest rate cuts. In addition to healthy economic growth that is supporting better-than-expected profit growth, the prospect of lower interest rates has been a positive tailwind for stocks. Iran’s direct attack on Israel raises the risk of further escalation and is also causing uncertainty and increased volatility for financial markets.

While higher-for-longer interest rates and a potential oil shock emanating from the Middle East are real concerns for stocks, pullbacks of 5% - 10% are to be expected in any given year, especially after the very strong 5-month rally we have experienced. So far, the pullback looks normal within an ongoing bull market. Important factors support a continued positive outlook for stocks.

In addition to healthy economic readings that continue to support better-than-expected profit growth, cyclical sectors that are major beneficiaries of economic growth continue to show market leadership while defensive sectors continue to underperform. High yield bonds are also an important indicator of potential economic weakness, and they are signaling a low concern of future defaults that would occur in a weak economy.