Highlights for This Week Include:

• The February retail sales report showed a rebound from January’s depressed level and remains consistent with economic growth. While uncertainty centered on government spending cuts and tariff impacts remains high, job and wage growth have consumers well positioned for future spending.
• Industrial production came in better than expected, consistent with resilient industrial activity. While the threat of tariffs remains an uncertainty, businesses should benefit from a friendlier regulatory environment and lower tax rates in the coming years.
• Major market averages have rebounded from correction territory and reacted favorably to the Federal Reserve’s (Fed’s) economic projections and Chairman Powell’s commentary on Wednesday. We note that pullbacks are common occurrences, and usually present good buying opportunities. Given our outlook for further economic growth, we continue to recommend that investors stay focused on their long-term investment plan.

February Retail Sales Rebounds from January Weakness but Suggests Subdued Spending

We follow consumer spending data closely, considering consumption makes up about 70% of economic activity in the U.S. Retail sales is an important consumer spending metric, and the February reading took on added significance after January’s weak reading that suggested a pullback in spending, albeit strongly influenced by unusually cold weather across the country and LA wildfires.

Retail sales rose 0.2% in February, with core retail sales (ex-autos, gasoline, and building materials) increasing by a healthier 1.0%. While rebounding from January’s weakness and alleviating concerns over a faltering consumer, retail sales so far this year is reflecting some retrenchment from strong sales momentum at the end of last year. Uncertainty surrounding government spending cuts and tariffs, which is showing up in consumer sentiment surveys, is also a potential source of spending weakness. We note that given a still healthy labor market, consumers remain well positioned for future spending.

Industrial Production Jumps, Consistent with Resilient Activity

Industrial production jumped 0.7% m/m in February, stronger than expected and up for the third straight month. While the strong reading partly reflects automakers rushing to build inventory before threatened tariffs, it also suggests that industrial activity remained resilient last month, with little obvious drag from uncertainty. While the threat of tariffs remains, businesses should benefit from a friendlier regulatory environment and lower tax rates in the coming years.

A notable gain in manufacturing came from the production of high-tech equipment which rose 1.4% in February, likely the result of investment in AI as well as the reshoring of semiconductor production. High-tech manufacturing is up 12.7% in the past year, the fastest pace of any major category. The mining sector was also a source of strength in February, rising 2.8%. A faster pace of oil and gas production, metal and mineral extraction, and drilling for new wells all contributed. The mining sector should be a major beneficiary of reduced regulation.

Fed Holds Interest Rates Steady and Still Suggests Two Cuts This Year

The Federal Reserve held interest rates steady at its meeting this week, with its projections for this year showing two 0.25% cuts amid downward revisions to economic growth and upward revisions to inflation. Fed Chairman Powell was dovish during his press conference, dismissing recent higher survey-based inflation expectations and describing transitory tariff price shocks as the "base case."

Stock Rebound from Correction Territory Continues After Federal Reserve Meeting

Stocks rallied on Wednesday after the Fed projections still showed two interest rate cuts this year, with Chairman Powell at the press conference not sounding too concerned about inflation expectations and inclined to view the potential rise in inflation from tariffs as transitory. This extends the relief rally that began last week from correction territory and oversold conditions. U.S. Treasury yields dropped sharply after the Fed meeting, which helped support the strong stock rally. We are also encouraged by cyclical leadership and broad participation during the recent rally.

We note pullbacks and consolidations are common, even during bull markets. The key market risk going forward is a major further deterioration in the economic outlook. The S&P 500 has experienced a median annual drawdown of 10% during the last 40 years, with severe drawdowns associated with recessions. The S&P 500 has declined by a median of 24% from peak to trough around recessions since WWII.

However, S&P 500 corrections are usually a good buying opportunity. Looking at the 21 cases of corrections of 10% or more since 1980 shows recessions associated with 7 and no recession associated with 14. At six months following the down 10% threshold, stocks are up on average about 10% in the no recession case and about 4% in the recession case. At one year following the down 10% threshold, stocks are up on average about 12% in the no recession case and are up about 1% in the recession case.

This highlights the importance of upcoming economic growth data for the trajectory of the equity market. As noted above, the incoming data remains consistent with further economic growth, albeit slower. We continue to recommend that investors stick with their long-term investment plans.